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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2000 Commission File Number 1-14472
CORNELL COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 76-0433642
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1700 West Loop South, Suite 1500, Houston, Texas 77027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (713) 623-0790
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Stock Exchange
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Common Stock,$.001 par value New York Stock Exchange
per share
Preferred Stock Purchase New York Stock Exchange
Rights
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be not contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|.
At February 28, 2001, Registrant had outstanding 9,228,000 shares of its
common stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $63,398,000 based on the
closing price of $7.85 per share as reported on the New York Stock Exchange. For
purposes of the foregoing calculation, all directors and officers of the
Registrant have been deemed to be affiliates, but the Registrant disclaims that
any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 2001 Annual Meeting Part III
of Stockholders.
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PART I
ITEM 1. BUSINESS
Cornell Companies, Inc. (the "Company" and formerly Cornell
Corrections, Inc.) is a leading private provider of corrections, treatment
and educational services to government agencies. Focusing on adult and
juvenile populations in both institutional and community settings, the
Company provides a full array of services in an environment of dignity and
respect, emphasizing community safety and rehabilitation in support of sound
public policy. As of December 31, 2000, the Company had contracts to operate
71 facilities with a total service capacity of 14,364. The Company's
facilities are located in 13 states and the District of Columbia. The
Company's service capacity is comprised of the number of beds available for
service upon completion of constuction of residential facilities and the
average program capacity of non-residential community-based programs.
Operating Divisions
The Company provides integrated facility development, design, construction
and operational services to government agencies within three operating
divisions: (a) adult secure institutional correctional and detention services;
(b) juvenile treatment, educational and detention services and (c) pre-release
correctional and treatment services.
Adult Secure Institutional Correctional and Detention Services. The
Company's adult secure institutional division provides maximum, medium, and
low-security incarceration. This division is committed to ensuring public safety
through the operation of a secure environment and inmates are provided with a
variety of programming and services geared toward offenders' successful
reintegration into society and a subsequent reduction in recidivism. At December
31, 2000, the Company operated or had under development nine facilities with a
total service capacity of 7,462 beds that provide adult secure institutional
correctional and detention services for incarcerated adults. For a listing of
facility locations and their service capacities, see "Facilities."
The adult secure institutional division provides:
o low to maximum-security incarceration services
o integrated facility development, design, construction and
operational services
o state-of-the-art correctional technology: electronic controls,
surveillance equipment, etc.
o basic education: preparation and testing for high school equivalency
exam (GED), English as a second language (ESL) classes, and Adult
Basic Education (ABE)
o vocational training: culinary arts, small engine repair, etc.
o health care: medical, dental, behavioral health and psychiatric
services
o individual and group counseling
o substance abuse treatment: detoxification, testing, counseling,
12-step programs and relapse prevention services
o life skills training including: proper hygiene, personal finance and
parenting skills
o institutional food services
o recreational activities: exercise programs, hobby/craft and leisure
activities
The Big Spring Complex, located in Big Spring, Texas, houses
minimum-security sentenced aliens with no history of serious assaultive behavior
who (a) have five years or less remaining on their sentences and will
participate in deportation hearings; and (b) those who have completed their
federal sentences and are awaiting transportation by the Immigration and
Naturalization Service (the "INS") to deportation and processing centers. The
INS and the United States Marshal Services ("USMS") also house inmates at the
Big Spring Complex. The Company completed a 560 bed expansion unit ("Cedar Hill
Unit") at the Big Spring Complex in the fourth quarter of 1998 and additional
expansions totaling 722 beds during the fourth quarter of 1999 and the first
quarter of 2000.
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The Great Plains Correctional Facility is an 812 bed medium security
prison located in Hinton, Oklahoma. The prison is operated pursuant to a
one-year contract with nine one-year renewal options between the Oklahoma
Department of Corrections and the Hinton Economic Development Authority
("HEDA"); HEDA in turn subcontracts the daily operations of the prison to the
Company. The Company assumed complete operation of Great Plains Correctional
Facility in July 1998. The Company has a 30-year operating contract with four
five-year renewals with HEDA.
The D. Ray James Prison began operations with 550 beds during the fourth
quarter of 1998 and houses offenders from the State of Georgia. The Company
completed a 450 bed expansion in the first quarter of 1999 and a 550 bed
expansion during the fourth quarter of 1999.
The Santa Fe County Adult Detention Facility is a 661 bed adult detention
facility that houses offenders from Santa Fe County and various surrounding
counties. Construction of this facility was completed in July 1998.
The Wyatt Detention Facility in Central Falls opened in 1993 and primarily
houses federal offenders awaiting adjudication under federal criminal charges.
The Leo Chesney Community Correctional Facility (for females) and the
Baker Community Correctional Facility (for males) are both in California and
house offenders sentenced by the State of California, most of whom are
non-violent offenders with sentences of up to two years.
In April 1999, the Company was awarded a contract to design, build and
operate a 1,095 bed prison for the FBOP in Moshannon Valley, Pennsylvania
("Moshannon Valley Correctional Center") and immediately commenced construction
and activation activities. In June 1999, the FBOP issued a Stop-Work Order
pending a re-evaluation of their environmental documentation supporting the
decision to award the contract. The environmental study was completed with a
finding of no significant impact. While the Stop-Work Order is still in effect,
management believes it will be lifted and construction will be resumed in the
near-term. In September 1999 the Company received correspondence from the Office
of the Attorney General of the Commonwealth of Pennsylvania indicating its
belief that the operation of a private prison in Pennsylvania is unlawful. The
Company has had, and continues to have, discussions with the Attorney General's
staff regarding these issues.
The Company assumed operations of the Valencia County Detention Center,
located in Los Lunas, New Mexico, during the fourth quarter of 2000. The
facility was renovated and expanded in the summer of 2000, increasing its
capacity to house 126 male and female detainees of various security levels in
separate living units.
Juvenile Treatment, Educational and Detention Services. The Company's
juvenile division provides residential, community-based, behavioral health and
alternative education programs to juveniles between the ages of 10 and 17. In
addition to meaningful treatment options, the programs also develop continuing
care plans which help bridge the juvenile back to the community. Under the names
"Cornell Abraxas" and "Cornell Interventions," the Company offers programs to
meet the multiple needs of troubled juveniles. At December 31, 2000, the Company
operated or had contracts to operate 19 residential facilities and 17
non-residential community-based programs serving an aggregate capacity of
approximately 3,206 youths. For a listing of facility locations, see
"Facilities." Juvenile correctional and detention services consist primarily of
treatment programs that are designed to lead to rehabilitation while providing
public safety and holding offenders accountable for their decisions and
behavior. The Company operates primarily within a restorative justice model. The
basic philosophy is that merely serving time in an institution does not relieve
juvenile offenders of the obligation to repay their victims and that
incarceration alone does not compensate for the societal impact of crimes. The
use of a balanced approach gives equal emphasis to accountability, competency
development and community protection.
-3-
The juvenile division provides:
o diverse treatment settings: physically-secure, staff-secure and
community-based
o specialized treatment for special populations including females,
drug sellers, sex offenders, firesetters and families
o individualized treatment planning and case management
o counseling: individual, group and family therapy; cognitive behavior
therapy and stress and anger management
o substance abuse treatment and relapse prevention and education
services
o life skills training: proper hygiene, personal finance and parenting
skills
o accredited alternative/special educational programs
o gender-specific programs
o employment training and assistance
o medical services
o wilderness training programs and accredited ropes course challenges
Descriptions of a sample of the Company's juvenile division operations are
as follows:
During the fourth quarter of 2000, Cornell Abraxas began operating the New
Morgan Academy in Morgantown, Pennsylvania. The New Morgan Academy is a secure
residential treatment program with a capacity to serve 214 clients, 12 to 18
years of age. This state-of-the-art facility houses six treatment units: sex
offender, habitual offender, substance abuse and behavioral health units for
males; a behavioral health unit for females; and a diagnostic/assessment unit
for males and females.
Three other large facilities operated by Cornell Abraxas include: (a) the
Cornell Abraxas I program ("A-1"); (b) the Leadership Development Program (the
"LDP") and (c) Cornell Abraxas of Ohio. A-1's campus is situated on
approximately 100 acres with an aggregate service capacity of 248 beds. Located
in the Allegheny National Forest, A-1 operates as an open residential facility
for the treatment of delinquent and/or dependent males who have substance abuse
problems and/or were involved in the sale of a controlled substance. A-1 also
operates a licensed school which offers a full range of educational services and
interscholastic sports programs. While at A-1, juvenile offenders may earn a
high school diploma, pursue vocational tracks or receive GED instruction and
testing. The LDP is conducted on property leased by the Company, located on
approximately 3.5 acres in South Mountain, Pennsylvania. The LDP is a 15-week
residential treatment program with a wilderness component. The program includes
group counseling, substance abuse treatment and licensed educational programs.
Cornell Abraxas of Ohio's facility is located on approximately 80 acres in north
central Ohio and has a service capacity of 108 beds. This residential facility
offers a comprehensive substance abuse treatment and education program for
males. Individuals participate in intensive group curriculum which includes a
wide variety of topics such as: stages of denial, self-help tools for recovery,
goal setting, values, beliefs and morals, relapse process and prevention and sex
education. The educational schools within Cornell Abraxas are accredited,
whereby graduating juveniles are eligible to receive a full high school diploma
as an alternative to the traditional GED certificate or vocational training.
Cornell Interventions operates various therapeutic community substance
abuse treatment programs for juveniles. The DuPage Adolescent Center is one such
program and was the first Cornell Interventions program to be accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") in 1994.
Cornell Interventions also operates the Residential School and Maple Creek Home,
both treatment facilities for youth with severe emotional and behavioral
problems. Key features of both programs include a strong educational program and
24-hour care, including availability of nursing staff and psychiatric
consultation. The non-residential community-based programs transition juvenile
offenders from residential placement back to their home communities. The Company
provides in-home counseling and intensive case management services while
integrating an array of community resources into a comprehensive plan. This
-4-
dual role of service provider and intermediary serves to bridge the gap between
residential facilities and the community. The Company utilizes therapists and
consulting psychologists in its multi-level treatment programs.
The 160 bed Salt Lake Valley Juvenile Detention Facility in Salt Lake
City, Utah includes an interactive satellite link to juvenile courtroom
facilities and judges, which allows for processing a high number of juvenile
detainees while reducing the time, effort and expense incurred in
transporting detainees to offsite courtrooms.
The Santa Fe County Juvenile Detention Facility in Santa Fe, New Mexico is
a 129 bed facility that houses juvenile offenders for Santa Fe County and
various surrounding counties. The facility, which was previously a 240 bed
facility that housed 200 adults and 40 juveniles, was renovated in 1999 to house
juveniles exclusively.
The Griffin Juvenile Facility is a 170 bed transitional living center for
juveniles located in San Antonio, Texas. The Company currently has contracts for
the housing of adjudicated and certain homeless non-adjudicated juveniles.
Pre-Release Correctional and Treatment Services. The Company's pre-release
division provides community-based services including job placement and treatment
and education programs as an alternative to incarceration as well as to aid in
the successful transition of offenders from a correctional facility back into
society. At December 31, 2000, the Company operated or had contracts to provide
pre-release correctional and treatment services within 20 residential facilities
and 6 non-residential community based programs with an aggregate service
capacity of 3,696 that provide pre-release correctional and treatment services.
For a listing of facility locations, see "Facilities."
The pre-release division provides:
o minimum-security and staff-secure residential services
o home confinement and electronic monitoring
o employability training and assistance: preparing for, securing and
maintaining employment
o basic education: preparation and testing for the GED, Adult Basic
Education (ABE), computer courses, college-level courses and
extensive libraries
o vocation training: culinary arts, construction, etc.
o counseling: individual, group and family therapy; cognitive behavior
therapy; stress and anger management
o substance-abuse treatment: detoxification, testing, counseling,
12-step programs and relapse prevention services
o life skills training: proper hygiene, securing appropriate housing,
personal finance, and parenting skills.
Descriptions of a sample of the Company's pre-release division operations
are as follows:
Southwood, located in Chicago, Illinois, is a JCAHO-accredited
substance-abuse treatment facility in operation since 1991 with a service
capacity of 329. The variety of programs focus on behavior modification and a
team approach to treatment and case management. Patients are treated, staffed
and discharged to various care levels in accordance with America Society for
Addictions Medicine criteria.
The Reid Community Correctional Center is a six-building complex situated
on nine and one-half acres in Houston, Texas. The Company contracts with the
Texas Department of Criminal Justice, Parole Division, and Texas Commission on
Alcohol and Drug Abuse (TCADA) to provide drug treatment for 310 adult male
clients. The center is TCADA-certified as a clinical counseling and training
institution.
-5-
The Dallas County Judicial Center (DCJTC) is set on 33 acres in Wilmer,
Texas and is the largest program of its type in Texas. DCJTC opened in 1991 and
has a service capacity to provide, with referred treatment, 300 adult felony
probationers with community-based, substance abuse treatment, as well as
medical, vocational, and rehabilitative services instead of prison.
Industry and Market
In the United States, there has been a growing trend toward privatization
of government services and functions, including correctional and detention
services, as governments of all types face continuing pressure to control costs
and improve the quality of services. Since December 1989, the service capacity
of privately managed adult secure institutional correctional and detention
facilities in operation or under construction has increased from 10,973 beds to
a capacity of 145,160 beds as of December 31, 1999, representing a compound
annual growth rate in beds of approximately 29%.
The United States leads the world in private prison management
contracts. At December 31, 1999, there were private adult secure
institutional correctional and detention facilities in operation or under
construction in 30 states, the District of Columbia and Puerto Rico.
According to reports issued by the United States Department of Justice,
Bureau of Justice Statistics (the "BJS"), the number of adult offenders
housed in United States federal and state prison facilities and in local
jails increased from 742,579 at December 31, 1985 to 1,931,859 persons at
mid-year 2000. Population growth during the 12-month period ending June 30,
2000 in state and local jails increased by 4.9%, while the federal population
rose by 9.3%. Management believes that the increase in the demand for
privatized adult secure institutional correctional and detention facilities
is also a result, in large part, of the general shortage of beds available in
United States adult secure institutional correctional and detention
facilities.
Prison population growth is driven by several factors including:
o Increases in Drug-Related Crimes. According to the BJS, drug
prosecutions in Federal courts increased from 21% of defendants in
1982 to 35% in 1998. In 1996 drug offenders comprised 33% of all
persons convicted of a felony in State courts. Drug traffickers
accounted for 21% of all convicted felons and drug possessors
accounted for 14% of all convicted felons.
o Increasing Prosecution and Imprisonment Rates; Stricter Sentencing
and Longer Incarceration. Federal prosecution, conviction and
incarceration rates have been rising steadily. In addition, the
Sentencing Reform Act of 1984 took effect in 1987 and established
federal sentencing guidelines that (a) require a prison term for
many offenses for which probation had previously been imposed, (b)
require longer sentences for certain offenses, (c) eliminate parole
in certain circumstances and (d) reduce the amount of good conduct
time federal offenders can earn.
Industry reports also indicate that adult offenders convicted of violent
crimes generally serve only one-third of their sentence, with the majority of
them being repeat offenders. Accordingly, there is a perceived public demand
for, among other things, longer prison sentences for adult offenders, as well as
prison terms for juvenile offenders, resulting in even more overcrowding in the
United States correctional and detention facilities. Finally, numerous courts
and other government entities in the United States have mandated that additional
services offered to offenders be expanded and living conditions be improved.
Many governments do not have the readily available resources to make the changes
necessary to meet such mandates.
The juvenile corrections industry has also expanded rapidly in recent
years as the need for services for at-risk and adjudicated youth has risen.
The growth in the juvenile correction system population has been driven by
the following trends:
o Increasing Juvenile Crime Rates. BJS studies demonstrate that
juveniles have represented a disproportionately high portion of
crime and arrest rates, particularly with regard to drug arrests.
-6-
o Rapid increases in Juvenile Population. In 1998, 70.2 million
Americans, more than 1 in 4, were under the age of 18. (National
Center for Juvenile Justice's Juvenile Offenders and Victims: 1999
National Report - September 1999 - Howard N. Snyder, Melissa
Sickmund and Shay Bilchik, Administrator Office of Juvenile Justice
and Delinquency Prevention.) The US Bureau of the Census has
estimated the juvenile population will increase by 19% between 1995
and 2007.
o Increase in "At-Risk" Juvenile Population. Numerous government and
academic studies have shown that certain socio-economic
characteristics increase the probability of a juvenile becoming
delinquent. Current and projected trends associated with these
characteristics point to a likely increase in juvenile delinquency.
- A Growing Number of Children Living in Single-Parent Families.
In 1998, 28% of children lived in single parent families,
compared to 23% in 1980 and only 10% in 1970.
- Growing Juvenile Poverty Rates. In 1997, 14.1 million
juveniles lived in poverty, representing an increase of 42%
over the number of juveniles living in poverty in 1978. In
addition, in 1997, the proportion of those under age 18 who
lived below the poverty level was almost double the poverty
rate of adults.
Pre-release correctional and treatment programs have experienced
significant growth, driven by an increased focus on rehabilitation and
reintegration into society and by the recognition of the fact that preparation
of inmates returning to society reduces recidivism rates. The pre-release area
primarily comprises individuals who have been granted parole, sentenced to
probation or require substance abuse or mental health treatment.
Probationers (individuals sentenced for an offense without incarceration)
and parolees (individuals released prior to the completion of their sentence)
are typically placed in pre-release settings. These individuals typically spend
three to six months in halfway houses preparing for re-integration into society.
A portion of the growth of the pre-release division is driven by the
overall growth of the adult prison population, as well as the release rate.
Despite the decreasing trend in violent crimes across the nation and an increase
in incarceration rates, there are still significant numbers of prisoners
released from prison, either conditionally or unconditionally, each year.
According to the BJS studies, the number of individuals released from state and
federal prison facilities increased by more than 20% from 1990 to 1997, from
431,753 to 521,808, respectively. Approximately 78%, or 369,808 prisoners, were
conditionally released (i.e., parole, probation, supervised mandatory release).
In 1997, prisoners released under a supervised mandatory release program
comprised nearly 38% of all prisoners released and 48% of all conditionally
released prisoners. The probation and parole populations represent approximately
71% of the total number of adults under correctional supervision in the United
States in 1997.
The demand for substance abuse and mental health treatment services is
based on the availability of services for alcohol and drug abusers. The Federal
Substance Abuse and Mental Health Services Administration ("SAMHSA") estimates
that there are three to five million individuals who use and abuse alcohol and
other drugs and who significantly impact the utilization of and the cost to the
health care, adult and juvenile justice, welfare, child welfare and other
publicly funded systems. However, only 1.8 million individuals can currently be
served through the existing publicly funded treatment system. An August 1999
SAMHSA survey indicates increases in substance abuse for many of the client
populations served by the Company. Demand for private treatment services has
traditionally been, and continues to be, driven by governmental departments of
corrections, health, human services, and children and family services
recognition of the need to provide substance abuse treatment to individuals and
families in their care.
-7-
The pre-release correctional and treatment services industry is extremely
fragmented with several thousand providers across the country, most of which are
small and operate in a specific geographic area.
History of Acquisitions
The Company is the successor to entities that began developing adult
secure institutional correctional and detention facilities in 1984, pre-release
correctional and treatment facilities in 1974 and juvenile facilities in 1973.
Since 1994, the Company has completed eight acquisitions.
In November 1999, the Company acquired substantially all of the adult and
juvenile treatment, educational and correctional assets of Interventions, a
not-for-profit corporation headquartered in Chicago, Illinois, and certain
assets of BHS Consulting Corporation, a for-profit firm that provided management
services to Interventions (collectively, "Interventions-Illinois"). The Company
paid an aggregate purchase price of approximately $31.8 million. The acquisition
included more than 30 programs operated within 13 facilities throughout Illinois
serving a daily population of approximately 1,880 adults and juveniles, and the
real properties of seven facilities.
In August 1998, the Company acquired substantially all of the Alaskan
assets of Allvest, Inc. ("Allvest"), a privately held company based in
Anchorage, Alaska. The Allvest acquisition included the operations of five
pre-release facilities with an aggregate capacity of 540 beds in Anchorage,
Fairbanks and Bethel, Alaska, the real properties of three of the five
facilities and assignments of contracts with the Alaska Department of
Corrections. The aggregate purchase price for the acquisition was approximately
$21.3 million.
In January 1998, the Company purchased the Great Plains Correctional
Facility, an existing 812 bed medium security prison located in Hinton,
Oklahoma, for approximately $43.8 million. The purchase included an additional
20 adjacent acres of land for potential future expansion of the facility. In
December 1999, the Company transferred ownership of the Great Plains
Correctional Facility to HEDA and retained a 75-year leasehold interest in the
facility.
In September 1997, the Company acquired substantially all of the assets of
The Abraxas Group, Inc. and four related entities (collectively, "Abraxas"), a
not-for-profit juvenile operator of seven residential facilities and 11
non-residential community-based programs, serving an aggregate capacity of
approximately 1,400 juvenile offenders and clients. The aggregate purchase price
for the acquisition was approximately $19.2 million.
In January 1997, the Company acquired substantially all of the assets of
Interventions Co. ("Interventions-Texas") for an aggregate purchase price of
$6.0 million. The acquisition included the operation of the Dallas County
Judicial Center, a 300 bed adult residential pre-release facility in Dallas,
Texas and the Griffin Juvenile Facility, a 150 bed capacity residential
transitional living center for juveniles in San Antonio, Texas.
In July 1996, the Company acquired substantially all the assets of MidTex
Detentions, Inc. ("MidTex"), the operator of adult secure institutional
facilities in Big Spring, Texas (the "Big Spring Complex"), for an aggregate
purchase price of approximately $23.2 million. The City of Big Spring has an
Intergovernmental Agreement (the "IGA") with the FBOP to house offenders at the
Big Spring Complex. As part of the acquisition, MidTex assigned to the Company
its rights under an operating agreement with the City of Big Spring (the "Big
Spring Operating Agreement") to manage the Big Spring Complex. The Big Spring
Operating Agreement has a lease term through 2047. The IGA has an indefinite
term, although it may be terminated or modified by the FBOP upon 90 days written
notice.
In May 1996, the Company acquired a 310 bed pre-release facility located
in Houston, Texas (the "Reid Community Correctional Center"), for approximately
$2.0 million. Included in the acquisition was the real and personal property and
the assignment of the Reid Community Correctional Center's contract with the
Texas Department of Criminal Justice ("TDCJ").
-8-
In March 1994, the Company acquired Eclectic Communications, Inc.
("Eclectic"), the operator of 11 privatized adult secure institutional and
pre-release facilities in California with an aggregate service capacity of 979
beds. Consideration for the acquisition of Eclectic was $10.0 million.
Facilities
As of December 31, 2000, the Company operated 70 facilities and had one
facility under development and construction. The facility under development and
construction is the Moshannon Valley Correctional Center. In addition to
providing management services, the Company has been involved in the development,
design and/or construction of many of these facilities. The following table
summarizes certain additional information with respect to facilities under
operation or development by the Company as of December 31, 2000:
Company
Total Initial Owned/
Service Contract Leased or
Facility Name and Location Capacity(1) Date(2) Managed(3)
-------------------------- ----------- ------- ----------
Adult Secure Institutional Correctional
and Detention Facilities:
Baker Community Correctional Facility ................ 262 1987 Leased
Baker, California
Big Spring Complex ................................... 2,454 (4) Owned/Leased(5)
Big Spring, Texas
D. Ray James Prison .................................. 1,550 1998 Owned
Charlton County, Georgia
Great Plains Correctional Facility ................... 812 (6) Leased (7)
Hinton, Oklahoma
Leo Chesney Community Correctional
Facility .......................................... 200 1988 Leased
Live Oak, California
Moshannon Valley Correctional Center ................. 1,095 1999 Leased
Philipsburg, Pennsylvania (8)
Santa Fe County Adult Detention Facility ............. 661 1997 Managed
Santa Fe, New Mexico
Valencia County Detention Center ..................... 126 2000 Managed
Los Lunas, New Mexico
Wyatt Detention Facility ............................. 302 1992 Managed
Central Falls, Rhode Island
Juvenile Treatment, Educational and Detention Facilities:
Residential Facilities:
City Girls Program ................................... 16 (9) Leased
Ashland, Illinois
Contact .............................................. 47 (9) Owned
Wauconda, Illinois
Cornell Abraxas I .................................... 248 1973 Owned
Marienville, Pennsylvania
Cornell Abraxas II ................................... 23 1974 Owned
Erie, Pennsylvania
Cornell Abraxas III .................................. 22 1975 Owned
Pittsburgh, Pennsylvania
(Table continued on following page)
-9-
Company
Total Initial Owned/
Service Contract Leased or
Facility Name and Location Capacity(1) Date(2) Managed(3)
-------------------------- ----------- ------- ----------
Juvenile Residential Facilities: (Continued)
Cornell Abraxas Center for Adolescent
Females ........................................... 46 1989 Owned
Pittsburgh, Pennsylvania
Cornell Abraxas of Ohio .............................. 108 1993 Owned
Shelby, Ohio
Cornell Abraxas Youth Center ......................... 92 1999 Leased
South Mountain, Pennsylvania
Danville Center for Adolescent Females ............... 64 1998 Managed
Danville, Pennsylvania
DuPage Adolescent Center ............................. 34 (9) Owned
Hinsdale, Illinois
Erie Residential Behavioral Health ................... 16 1999 Leased
Erie, Pennsylvania
Griffin Juvenile Facility ............................ 170 1996 Owned
San Antonio, Texas
Leadership Development Program ....................... 120 1994 Leased
South Mountain, Pennsylvania
New Morgan Academy ................................... 214 2000 Leased
New Morgan, Pennsylvania
Psychosocial Rehabilitation Unit ..................... 13 1994 Owned
Erie, Pennsylvania
Residential School ................................... 30 (9) Owned
Matteson, Illinois
Salt Lake Valley Juvenile Detention Facility ......... 160 1996 Managed
Salt Lake City, Utah
Santa Fe County Juvenile Detention Facility .......... 129 1997 Managed
Santa Fe, New Mexico
South Mountain Secure Residential
Treatment Unit .................................... 52 1997 Managed
South Mountain, Pennsylvania
Juvenile Non-Residential Community-Based Centers:
Adams County Mental Health ........................... 34 1998 Leased
Oxford, Pennsylvania
Cornell Abraxas Parenting Academy .................... 36 1999 Leased
Harrisburg, Pennsylvania
Cornell Abraxas Student Academy ...................... 110 1996 Leased
Harrisburg, Pennsylvania
Day Treatment Program ................................ 58 1996 Leased
Harrisburg, Pennsylvania
Delaware Community Programs .......................... 33 1994 Leased
Milford, Delaware
(Table continued on following page)
-10-
Company
Total Initial Owned/
Service Contract Leased or
Facility Name and Location Capacity(1) Date(2) Managed(3)
-------------------------- ----------- ------- ----------
Juvenile Non-Residential Community-Based Centers: (Continued)
Erie Behavioral Health Services ...................... 36 1997 Leased
Erie, Pennsylvania
Juvenile Field Services .............................. 110 (9) Managed
Chicago, Illinois
Kline Plaza .......................................... 251 1996 Leased
Harrisburg, Pennsylvania
Lehigh Valley Community Programs ..................... 31 1992 Leased
Lehigh Valley, Pennsylvania
Lycoming/Clinton County Behavioral
Health Services ................................... 30 1998 Leased
Williamsport, Pennsylvania
Maple Creek Home ..................................... 8 (9) Owned
Matteson, Illinois
Non-Residential Care - West .......................... 25 (9) Leased
Pittsburgh, Pennsylvania
Harrisburg ........................................... 91 1999 Leased
Harrisburg, Pennsylvania
Philadelphia Community Programs ...................... 60 1992 Owned
Philadelphia, Pennsylvania
Supervised Home Services/Home Detention .............. 64 1993 Leased
District of Columbia
Workbridge Allegheny ................................. 475 1994 Leased
Pittsburgh, Pennsylvania
Workbridge Philadelphia .............................. 150 1998 Leased
Philadelphia, Pennsylvania
Pre-Release Residential Correctional and
Treatment Facilities:
Cordova Center ....................................... 192 1985 Owned
Anchorage, Alaska
Dallas County Judicial Center ........................ 300 1991 Leased
Wilmer, Texas
Durham Center ........................................ 75 1996 Leased
Durham, North Carolina
El Monte Center ...................................... 55 1993 Leased
El Monte, California
Inglewood Men's Center ............................... 50 1982 Leased
Inglewood, California
Leidel Community Correctional Center ................. 150 1996 Owned
Houston, Texas
Marvin Gardens Center ................................ 42 1981 Leased
Los Angeles, California
(Table continued on following page)
-11-
Company
Total Initial Owned/
Service Contract Leased or
Facility Name and Location Capacity(1) Date(2) Managed(3)
Pre-Release Residential Correctional and
Treatment Facilities: (Continued)
Midtown Center ....................................... 32 1998 Owned
Anchorage, Alaska
Northstar Center ..................................... 105 1990 Leased
Fairbanks, Alaska
Oakland Center ....................................... 61 1981 Leased
Oakland, California
Parkview Center ...................................... 112 1993 Owned
Anchorage, Alaska
Reid Community Correctional Center ................... 310 1996 Owned
Houston, Texas
Salt Lake City Center ................................ 58 1995 Leased
Salt Lake City, Utah
San Diego Center ..................................... 131 1984 Leased
San Diego, California
Santa Barbara Center ................................. 25 1996 Leased
Santa Barbara, California
Seaside Center ....................................... 40 1999 Leased
Nome, Alaska
Southwood ............................................ 329 (9) Owned
Chicago, Illinois
Taylor Street Center ................................. 177 1984 Leased
San Francisco, California
Tundra Center ........................................ 99 1986 Owned
Bethel, Alaska
Woodridge ............................................ 139 (9) Owned
Woodridge, Illinois
Pre-Release Non-Residential Community-Based
Treatment Centers:
Bolingbrook .......................................... 111 (9) Leased
Bolingbrook, Illinois
East St. Louis ...................................... 80 (9) Leased
East St. Louis, Illinois
Joliet ............................................... 100 (9) Leased
Joliet, Illinois
Northside Clinic ..................................... 202 (9) Owned
Chicago, Illinois
Santa Fe Electronic Monitoring ....................... 50 1999 Leased
Santa Fe, New Mexico
Southwestern Illinois Correctional Center (10) ....... 671 (9) Managed
East St. Louis, Illinois
(Footnotes on the following page)
-12-
(1) Total service capacity is comprised of the beds available for service upon
completion of construction of residential facilities and the average
program capacity of the non-residential community-based facilities. In
certain cases, the management contract for a facility provides for a lower
number of beds.
(2) Date from which the Company, or its predecessor, has had a contract for
services on an uninterrupted basis.
(3) The Company does not incur any facility use costs for facilities which the
Company only has a management contract.
(4) The City of Big Spring entered into the IGA with the FBOP for an
indefinite term (until modified or terminated) with respect to the Big
Spring Complex, which began operations during 1989. The Big Spring
Operating Agreement, as amended, has a term through 2047 including renewal
options at the Company's discretion, pursuant to which the Company manages
the Big Spring Complex for the City of Big Spring. The portion of the Big
Spring Operating Agreement relating to the Cedar Hill Unit has a term of
30 years with four five-year renewal options at the Company's discretion.
(5) In connection with the acquisition of MidTex, and as part of the purchase
price, the Company prepaid a majority of the facility costs related to
three of the Big Spring Complex units. The Company owns the Cedar Hill
Unit originally constructed in 1998.
(6) The prison is operated pursuant to a one-year contract with nine one-year
renewal options between the Oklahoma Department of Corrections and HEDA.
HEDA in turn has subcontracted the operations to the Company under a
30-year operating contract with four five-year renewals.
(7) In December 1999, the Company transferred ownership of the Great Plains
Correctional Facility to HEDA and retained a leasehold interest in the
property for a term of 75 years plus renewal options.
(8) In April 1999, the Company was awarded a contract to design, build and
operate the Moshannon Valley Correctional Center and immediately commenced
construction and activation activities. In June 1999, the FBOP issued a
Stop-Work Order pending a re-evaluation of their environmental
documentation supporting the decision to award the contract. The
environmental study was completed with a finding of no significant impact.
While the Stop-Work Order is still in effect, management believes it will
be lifted and construction will be resumed in the near-term.
(9) The Cornell Interventions programs/facilities contract with numerous
agencies throughout Illinois. Initial contract dates vary by agency and
range from 1974 to 1997.
(10) The Company manages a therapeutic community drug and alcohol program
operated within the state operated Southwestern Illinois Correctional
Center.
Facility Management Contracts
The Company's facility management contracts generally provide that the
Company will be compensated at an occupant per diem rate, fees for treatment
service, or cost-plus reimbursement. Such compensation is invoiced in accordance
with the applicable contract and is typically paid to the Company on a monthly
basis. Some of the Company's juvenile education contracts provide for annual
payments. Under a per diem rate structure, a decrease in occupancy rates would
cause a decrease in revenues and profitability. The Company is, therefore,
dependent upon governmental agencies to supply the Company's facilities with a
sufficient number of offenders or clients to meet the contract capacities.
However, in most cases, such governmental agencies are under no obligation to do
so. Moreover, because certain of the Company's facilities have offenders or
clients serving relatively short sentences or only the last three to six months
of their sentences, the high turnover rate of offenders or clients requires a
constant influx of new offenders or clients from the relevant governmental
agencies to provide sufficient occupancies to achieve profitability. Occupancy
rates during a facility's start-up phase typically result in capacity
under-utilization for at least 30 to 90 days. Following a contract award, the
Company incurs facility start-up costs including initial employee training,
travel and other direct expenses incurred in connection with the contract. These
costs vary by contract. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
All of the Company's contracts are subject to legislative appropriations.
A failure by a governmental agency to receive appropriations could result in the
termination of the contract by such agency or a reduction of the management fee
payable to the Company. To date, the Company has not lost a material contract
due to a governmental agency not receiving appropriations, although no assurance
can be given that the governmental agencies will continue to receive
appropriations in all cases.
-13-
The Company's contracts generally require the Company to operate each
facility in accordance with all applicable laws and regulations. The Company is
required by its contracts to maintain certain levels of insurance coverage for
general liability, workers' compensation, vehicle liability and property loss or
damage. The Company is also required to indemnify the contracting agency for
claims and costs arising out of the Company's operations, and in certain cases,
to maintain performance bonds.
The Company's facility management contracts typically have terms ranging
from one to five years and many contracts provide for one or more renewal
options for terms ranging from one to five years. Only the contracting
governmental agency may exercise a renewal option. In connection with the
exercise of the renewal option, the contracting governmental agency or the
Company typically has requested changes or adjustments to the contract terms.
Additionally, the Company's facility management contracts typically allow a
contracting governmental agency to terminate a contract without cause by giving
the Company written notice ranging from 30 to 180 days. To date, none of the
Company's contracts have been terminated before expiration.
Marketing and Business Development
The Company's principal customers are federal, state and local
governmental agencies responsible for adult and juvenile corrections, treatment
and educational services. The development process for obtaining facility
management contracts consists of several steps including issuance of a Request
for Proposal ("RFP") by a contracting agency, submission of a response to the
RFP by the Company, the award of the contract by a governmental agency and the
commencement of construction or operation of the facility. These agencies
generally procure services from the private sector by issuing a RFP to which a
number of companies may respond. Most of the Company's efforts to obtain new
business opportunities are expected to be in the form of responding to RFPs. As
part of the Company's process of responding to RFPs, management of the Company
meets with appropriate personnel from the requesting agency to best determine
the agency's distinct needs. If the Company believes the project complies with
its strategic business plan, the Company will submit a written response to the
RFP. When responding to RFPs, the Company incurs costs, typically ranging from
$10,000 to $75,000 per proposal, to determine the prospective client's distinct
needs and prepare a detailed response to the RFP. In addition, the Company may
incur substantial costs to acquire options to lease or purchase land for a
proposed facility and engage outside consulting and legal expertise related to a
particular RFP. The preparation of a response to an RFP typically takes from
five to ten weeks.
A typical RFP requires bidders to provide detailed information, including,
but not limited to, descriptions of the following: services to be provided by
the bidder, bidder's experience and qualifications, and the price at which the
bidder is willing to provide the services requested by the agency (which
services may include the renovation, improvement or expansion of an existing
facility or the planning, design and construction of a new facility). The
governmental agency will award a contract based on proposals received in
response to an RFP; however, the agency does not necessarily award a contract to
the lowest bidder. In addition to costs, governmental agencies consider factors
including bidders' experience and qualifications.
The Company's experience has been that a substantial period of time may
elapse from the initial inquiry to receipt of a new contract, although, as the
concept of privatization has gained wider acceptance, the length of time from
inquiry to the award of contract has shortened. The length of time required to
award a contract is also affected, in some cases, by the need to introduce
enabling legislation. The bidding and award process for an RFP typically takes
from three to nine months. Generally, if the facility for which an award has
been made must be constructed, a newly constructed facility typically commences
operations between 12 and 24 months after the contract award.
The Company may receive inquiries from or on behalf of governmental
agencies considering privatization of certain facilities or that have already
decided to contract with private providers. When such an inquiry is received,
the Company determines whether there is a need for the Company's services and
whether the legal and political climate in which the governmental agency
operates is conducive to serious consideration of privatization. The Company
then conducts an initial cost analysis to further determine project feasibility.
-14-
When a contract requires construction of a new facility, the Company's
success depends, in part, upon its ability to acquire real property for its
facilities on desirable terms and at satisfactory locations. Management of the
Company expects that many such locations will be in or near populous areas and
therefore anticipates legal action and other forms of opposition from residents
in areas surrounding certain proposed sites. The Company may incur significant
expenses in responding to such opposition and there can be no assurance of
success. In addition, the Company may choose not to bid in response to an RFP or
may determine to withdraw a bid if legal action or other forms of opposition are
anticipated.
Operations
Pursuant to the terms of its management contracts, the Company is
responsible for the overall operation of its facilities, including staff
recruitment, general facility administration, security and supervision of the
offenders or clients and facility maintenance. The Company also provides a
variety of rehabilitative and educational programs at many of its facilities.
See "Operating Divisions" for a description of services provided.
The Company operates each facility in accordance with Company-wide
policies and procedures based on the standards and guidelines established by the
American Correctional Association ("ACA") Commission on Accreditation and/or the
appropriate licensing agencies. ACA is made up of corrections industry
professionals and is the only organization to administer national accreditation
for all facets of adult and juvenile corrections facilities and programs. ACA
standards are the national benchmark for the effective operation of correctional
systems throughout the United States and address services, programs, and
operations essential to good correctional management including administrative
and fiscal controls, staff training and development, physical plant, safety and
emergency procedures, sanitation, food service, and rules and discipline.
Internal quality control, conducted by senior facility staff and executive
officers of the Company, takes the form of periodic operational, programming and
fiscal audits; facility inspections; regular review of logs, reports and files;
and strict maintenance of personnel standards, including an active training
program. Each of the Company's facilities develops its own training plan that is
reviewed, evaluated and updated annually. All adult correctional officers
undergo a minimum 40-hour orientation upon their hiring and receive
academy-level training amounting to 120 hours and on-the-job training of up to
80 hours. Each correctional officer also receives up to 40 hours of continuing
training and education annually. All juvenile treatment employees undergo a
minimum 80-hour orientation upon their hiring and also receive up to 40 hours of
continuing training and education annually.
Facility Design, Construction and Finance
In addition to operating correctional and treatment facilities, the
Company also provides consultation and management services to governmental
agencies with respect to the development, design and construction of new
correctional and detention facilities as well as the redesign and renovation of
older facilities. The Company or its predecessors have consulted on and/or
managed the development, design and/or construction of a number of facilities in
each operating division.
The Company utilizes a group of experts in their respective fields to
participate from the conceptual design to the final construction of a project.
Professional architectural consultants are integral members of that group. When
designing a facility, the Company's outside architects utilize, with appropriate
modifications, prototype designs the Company has previously used in developing
projects. Management of the Company believes that the use of such proven designs
allows the Company to reduce cost overruns and avoid construction delays.
Additionally, the Company designs its facilities with the intention to improve
security and minimize the personnel needed to sufficiently staff the facility by
utilizing enhanced visual and electronic surveillance of the facility.
The Company may propose various construction financing structures to the
contracting agencies. The agency may finance, or the Company may arrange for the
financing of, the construction of such facilities
-15-
through various methods including, but not limited to, the following: (a) a
one-time general revenue appropriation by the governmental agency for the cost
of the new facility; (b) general obligation bonds secured by either a limited or
unlimited tax levy by the issuing governmental entity or (c) lease revenue bonds
or certificates of participation secured by an annual lease payment that is
subject to annual or bi-annual legislative appropriations. If the project is
financed using project-specific tax-exempt bonds or other obligations, the
construction contract is generally subject to the sale of such bonds or
obligations. If such bonds or obligations are not sold, construction and
management of the facility will be delayed until alternate financing is procured
or development of the project will be entirely suspended. When the Company is
awarded a facility management contract, appropriations for the first annual or
bi-annual period of the contract's term have generally already been approved,
and the contract is subject to governmental appropriations for subsequent annual
or bi-annual periods.
The Company has in the past worked with governmental agencies and
placement agents to obtain and structure financing for construction of
facilities. In some cases, an unrelated special purpose corporation is
established to incur borrowings to finance construction and own the facilities
and, in other cases, the Company directly incurs borrowings for construction
financing. A growing trend in the privatization industry is the requirement by
governmental agencies that private operators make capital investments in new
facilities and enter into direct financing arrangements in connection with the
development of such facilities. There can be no assurance the Company will have
available capital if and when required to make such an investment to secure a
contract for developing a facility.
Competition
The Company competes with a number of companies, including, but not
limited to, Corrections Corporation of America, Wackenhut Corrections
Corporation and Correctional Services Corporation. The Company also competes in
some markets with small local companies that may have better knowledge of local
conditions and may be better positioned to gain political and public acceptance.
The Company may also compete in some markets with governmental agencies that
operate correctional and detention facilities.
Employees
At December 31, 2000, the Company had approximately 3,404 full-time
employees and 269 part-time employees. The Company employs management,
administrative and clerical, security, educational and counseling services,
health services and general maintenance personnel. Approximately 396 employees
at three of the Company's facilities are represented by unions. The Company
believes its relations with its employees are good.
Regulations
The industry in which the Company operates is subject to federal, state
and local regulations administered by a variety of regulatory authorities.
Generally, prospective providers of correctional, detention and pre-release
services must comply with a variety of applicable state and local regulations,
including education, healthcare and safety regulations. The Company's contracts
frequently include extensive reporting requirements and require supervision with
on-site monitoring by representatives of contracting governmental agencies.
In addition to regulations requiring certain contracting governmental
agencies to enter into a competitive bidding procedure before awarding
contracts, the laws of certain jurisdictions may also require the Company to
award subcontracts on a competitive basis or to subcontract with businesses
owned by women or members of minority groups.
Business Concentration
For the years ended December 31, 2000, 1999 and 1998, 18.5%, 19.8% and
20.1%, respectively, of the Company's consolidated revenues were derived from
contracts with the FBOP.
-16-
Insurance
The Company maintains a $10 million per occurrence per facility general
liability insurance policy for all its operations. The Company also maintains
insurance in amounts it deems adequate to cover property and casualty risks,
workers' compensation and directors' and officers' liability.
The Company's contracts and the statutes of certain states in which the
Company operates typically require the maintenance of insurance by the Company.
The Company's contracts provide that, in the event the Company does not maintain
such insurance, the contracting agency may terminate its agreement with the
Company. The Company believes that it is in compliance in all material respects
with these requirements.
ITEM 2. PROPERTIES
The Company leases corporate headquarters office space in Houston, Texas
and regional administrative offices in Ventura, California, Pittsburgh,
Pennsylvania and Chicago, Illinois. The Company also leases various facilities
it is currently operating or developing. For a listing of owned and leased
facilities, see "Business - Facilities."
ITEM 3. LEGAL PROCEEDINGS
The Company currently and from time to time is subject to claims and suits
arising in the ordinary course of business, including claims for damages for
personal injuries or for wrongful restriction of, or interference with, offender
privileges and employment matters. In the opinion of management of the Company,
the outcome of the proceedings to which the Company is currently a party will
not have a material adverse effect upon the Company's operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of 2000.
-17-
PART II
ITEM 5. MARKET FOR CORNELL COMPANIES, INC. COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company is currently listed on the New York Stock
Exchange ("NYSE") under the symbol "CRN." As of February 28, 2001, there were
approximately 44 record holders of common stock. The quarterly high and low
closing sales prices for the common stock from January 1, 1999 through February
28, 2001 are shown below:
High Low
1999: -------- --------
First Quarter ................................ $19 5/8 $13 1/4
Second Quarter ............................... 22 5/8 15 1/2
Third Quarter ................................ 17 1/8 13 15/16
Fourth Quarter ............................... 16 3/8 8 1/8
2000:
First Quarter ................................ 11 7 9/16
Second Quarter ............................... 11 6 9/16
Third Quarter ................................ 9 6 1/8
Fourth Quarter ............................... 8 3/16 3 1/2
2001:
First Quarter (through February 28, 2001) .... 8 1/4 5 11/16
The Company has never declared or paid cash dividends on its capital
stock. The Company currently intends to retain excess cash flow, if any, for use
in the operation and expansion of its business and does not anticipate paying
cash dividends on the common stock in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will be
dependent upon, among other factors, the Company's results of operations;
financial condition; capital requirements; restrictions, if any, imposed by
financing commitments and legal requirements. The Amended and Restated Credit
Agreement, dated as of July 21, 2000 ("2000 Credit Facility"), and the Company's
Note and Equity Purchase Agreement, dated as of July 21, 2000 ("Subordinated
Notes"), currently prohibit the payment of dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
-18-
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
Year Ended December 31,
--------------------------------------------------------
2000 1999(1) 1998(2) 1997(3) 1996(4)
-------- --------- -------- -------- --------
(dollars in thousands, except per share data)
Statement of Operations Data:
Revenues ...................................... $226,050 $ 176,967 $123,119 $ 70,302 $ 32,327
Income from operations ........................ 29,061 22,249 12,589 5,630 339
Income (loss) before income taxes and
cumulative effect of change in
accounting principle ........................ 13,507 13,844 10,104 5,553 (2,304)
Income (loss) before cumulative effect
of change in accounting principle ........... 7,969 8,306 6,062 3,554 (2,379)
Cumulative effect of change in accounting
principle, net of related income tax
benefit of $1,969 in 1999 .................. -- 2,954 -- -- --
Net income (loss) ............................. $ 7,969 $ 5,352 $ 6,062 $ 3,554 $ (2,379)
Earnings (loss) per share:
- Basic
Income before cumulative effect of
change in accounting principle ............ $ .85 $ .88 $ .64 $ .48 $ (.65)
Net income (loss) ........................... $ .85 $ .57 $ .64 $ .48 $ (.65)
- Diluted
Income before cumulative effect of
change in accounting principle ............ $ .84 $ .86 $ .62 $ .46 $ (.65)
Net income (loss) ........................... $ .84 $ .55 $ .62 $ .46 $ (.65)
Number of shares used to compute EPS
(in thousands):
- Basic ................................... 9,383 9,432 9,442 7,350 3,673
- Diluted ................................. 9,495 9,660 9,772 7,740 3,673
Operating Data:
Total service capacity:
Residential ................................. 11,318(5) 11,796 9,135 6,172 3,577
Non-residential community-based ............. 3,046 3,049 1,390 900 --
-------- --------- -------- -------- --------
Total ..................................... 14,364(5) 14,845 10,525 7,072 3,577
Service capacity in operation
(end of period) ............................. 13,269 12,240 8,700 5,061 2,899
Contracted beds in operation
(end of period)(6) .......................... 10,061 9,029 7,310 4,161 2,899
Average occupancy based on contracted
beds in operation (6)(7) .................... 94.3% 95.8% 93.8% 97.6% 97.0%
Average occupancy excluding start-up
operations (6) .............................. 96.0% 97.0% 98.3% 97.6% 97.0%
Balance Sheet Data:
Working capital (deficit) ..................... $ 29,703 $ (12,636) $ 16,828 $ 26,220 $ 7,747
Total assets .................................. 291,439 273,991 212,695 104,109 46,824
Long-term debt ................................ 146,926 101,500 98,480 432 745
Stockholders' equity .......................... 104,320 97,208 91,500 86,730 41,051
-19-
Notes to Selected Consolidated Financial Data
(1) Includes the operations of Interventions-Illinois acquired in November
1999.
(2) Includes the operations of the Great Plains Correctional Facility acquired
in January 1998 and the Alaska facilities purchased from Allvest in August
1998.
(3) Includes the operations of Interventions-Texas and Abraxas acquired in
January 1997 and September 1997, respectively.
(4) Includes the operations of the Reid Community Correctional Center and the
Big Spring Complex acquired in May 1996 and July 1996, respectively.
(5) The Utah Department of Corrections ("Utah DOC") selected the Company's bid
in June 1999 for the 490 bed Timpie Valley Correctional Facility subject
to final contract negotiations. In 2000, the Utah DOC declined to pursue
this project, therefore the Company's service capacity was reduced
accordingly.
(6) Occupancy percentages are based on contracted service capacity of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(7) Occupancy percentages reflect less than normalized occupancy during the
start-up phase of any applicable facility, resulting in a lower average
occupancy in periods when the Company has substantial start-up activities.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The Company is a leading private provider of corrections, treatment and
educational services to government agencies. As of December 31, 2000, the
Company had contracts to operate 71 facilities with a total service capacity
of 14,364. The Company's facilities are located in 13 states and the District
of Columbia.
The Company provides integrated facility development, design, construction
and operational services to government agencies within three operating
divisions: (a) adult secure institutional, correctional and detention services;
(b) juvenile treatment, educational and detention services and (c) pre-release
correctional and treatment services. The following table sets forth for the
periods indicated total service capacity, the service capacity and contracted
beds in operation at the end of the periods shown and the average occupancy
percentages.
Year Ended December 31,
-----------------------------
2000 1999 1998
------ ------ ------
Total service capacity (1):
Residential ................................................. 11,318(2) 11,796 9,135
Non-residential community-based ............................. 3,046 3,049 1,390
------ ------ ------
Total ..................................................... 14,364(2) 14,845 10,525
Service capacity in operation (end of period) .................... 13,269 12,240 8,700
Contracted beds in operation (end of period) (3) ................. 10,061 9,029 7,310
Average occupancy based on contracted beds in operation (3)(4) ... 94.3% 95.8% 93.8%
Average occupancy excluding start-up operations (3) .............. 96.0% 97.0% 98.3%
(1) The Company's service capacity is comprised of the number of beds
available for service upon completion of construction of residential
facilities and the average program capacity of non-residential
community-based programs.
(2) The Utah DOC selected the Company's bid in June 1999 for the 490 bed
Timpie Valley Correctional Facility subject to final contract
negotiations. In 2000, the Utah DOC declined to pursue this project,
therefore the Company's service capacity was reduced accordingly.
(3) Occupancy percentages are based on contracted service capacity of
residential facilities in operation. Since certain facilities have service
capacities that exceed contracted capacities, occupancy percentages can
exceed 100% of contracted capacity.
(4) Occupancy percentages reflect less than normalized occupancy during the
start-up phase of any applicable facility, resulting in a lower average
occupancy in periods when the Company has substantial start-up activities.
The Company derives substantially all its revenues from providing
corrections, treatment and educational services to federal, state and local
government agencies in the United States. Revenues for the Company's services
are generally recognized on a per diem rate based upon the number of occupant
days or hours served for the period or cost-plus reimbursement.
Factors which the Company considers in determining the per diem rate to
charge include: (a) the programs specified by the contract and the related
staffing levels; (b) wage levels customary in the respective geographic areas;
(c) whether the proposed facility is to be leased or purchased and (d) the
anticipated average occupancy levels which the Company believes could reasonably
be maintained.
Although the Company has experienced higher operating margins in its adult
secure institutional and pre-release divisions as compared to the juvenile
division, the Company's operating margins generally vary from facility to
facility based on the level of competition for the contract award, the proposed
length of the contract, the occupancy levels for a facility, the level of
capital commitment required with respect to a facility, the anticipated changes
in operating costs over the term of the contract, and the Company's ability to
increase contract revenues. The Company has and expects to experience interim
period operating margin
-21-
differences due to the number of calendar days in the period, higher payroll
taxes in the first half of the year, and salary and wage increases which are
incurred prior to certain contract revenue increases.
The Company is responsible for all facility operating expenses, except for
certain debt service and lease payments with respect to facilities for which the
Company has only a management contract (nine facilities in operation at December
31, 2000).
A majority of the Company's facility operating expenses consist of fixed
costs. These fixed costs include lease and rental expense, insurance, utilities
and depreciation. As a result, when the Company commences operation of new or
expanded facilities, fixed operating expenses increase. The amount of the
Company's variable operating expenses, including food, medical services,
supplies and clothing, depend on occupancy levels at the facilities operated by
the Company. The Company's largest single operating expense, facility payroll
expense and related employment taxes and costs, has both a fixed and a variable
component. The Company can adjust the staffing and payroll to a certain extent
based on occupancy at a facility, but a minimum fixed number of employees is
required to operate and maintain any facility regardless of occupancy levels.
Personnel costs are subject to increase in tightening labor markets based on
local economic and other conditions.
Pre-opening and start-up expenses consist primarily of payroll, benefits,
training and other operating costs prior to opening a new or expanded facility
and during the period of operation while occupancy is ramping up.
In January 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," or SOP 98-5, and recorded a
net-of-tax charge of approximately $3.0 million for the cumulative effect of a
change in accounting principle. As a result of the Company's adoption of SOP
98-5, the Company began to expense pre-opening and start-up costs as incurred.
General and administrative expenses consist primarily of salaries of the
Company's corporate and administrative personnel who provide senior management,
finance, accounting, human resources, payroll, information systems and other
services and costs of business development.
Newly opened facilities are staffed according to contract requirements
when the Company begins receiving offenders or clients. Offenders or clients are
typically assigned to a newly opened facility on a phased-in basis over a one-
to three-month period, although certain programs require a longer time period to
reach break-even occupancy levels. The Company incurs start-up operating losses
at new facilities until break-even occupancy levels are reached. Quarterly
results can be substantially affected by the timing of the commencement of
operations as well as development and construction of new facilities.
Working capital requirements generally increase immediately prior to the
Company's commencing management of a new or expanded facility as the Company
incurs start-up costs and purchases necessary equipment and supplies before
facility management revenue is realized.
Results of Operations
The Company's historical operating results reflect a significant expansion
of the Company's business. Material fluctuations in the Company's results of
operations are principally the result of the timing and effect of acquisitions,
the level of new contract development activity conducted by the Company, and
occupancy rates at Company-operated facilities. The Company's acquisitions have
been accounted for using the purchase method of accounting, whereby the
operating results of the acquired businesses have been reported in the Company's
operating results since the date of acquisition.
-22-
The following table sets forth for the periods indicated the percentages
of revenues represented by certain items in the Company's historical
consolidated statements of operations:
Year Ended December 31,
--------------------------
2000 1999 1998
------ ------ ------
Revenues ........................................................... 100.0% 100.0% 100.0%
Operating expenses ................................................. 77.6 76.8 80.2
Pre-opening and start-up expenses .................................. 1.0 1.7 --
Depreciation and amortization ...................................... 3.2 3.3 3.4
General and administrative expenses ................................ 5.3 5.6 6.2
------ ------ ------
Income from operations ............................................. 12.9 12.6 10.2
Interest expense, net .............................................. 6.9 4.8 2.0
------ ------ ------
Income before income taxes and cumulative effect of change
in accounting principle ....................................... 6.0 7.8 8.2
Provision for income taxes ......................................... 2.5 3.1 3.3
------ ------ ------
Income before cumulative effect of change in accounting principle .. 3.5% 4.7% 4.9%
====== ====== ======
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenues. Revenues increased 27.7% to $226.1 million for the year ended
December 31, 2000 from $177.0 million for the year ended December 31, 1999.
Adult secure institutional division revenues increased 19.9% to $91.2
million for the year ended December 31, 2000 from $76.0 million for the year
ended December 31, 1999 due principally to (a) the final 550 bed expansion of
the D. Ray James Prison which began housing inmates late in the first quarter of
2000 and reached a full occupancy level late in the second quarter of 2000, (b)
the opening of the additional 450 bed second phase of the D. Ray James Prison in
the first quarter of 1999, (c) expansions at the Big Spring Complex completed in
the fourth quarter of 1999 and the first quarter of 2000 and (d) the opening of
the Valencia County Detention Center in the fourth quarter of 2000. These
revenue increases were offset, in part, by reductions in occupancy at certain
facilities including a temporary reduction at the Great Plains Correctional
Facility. As of December 31, 2000, occupancy at these facilities had returned to
normal occupancy levels. Additionally, during the fourth quarter of 2000, the
Company entered into a license agreement with its construction contractor that
conveyed certain rights to the design of an adult secure institution. A
non-recurring license agreement payment of $950,000 was recognized as revenue by
the Company. The Company has not licensed such designs in prior years and does
not expect to generate significant revenues from such activity in future
periods. Revenues attributable to start-up operations were approximately $44,000
and $866,000, for the years ended December 31, 2000 and 1999, respectively, and
related primarily to the D. Ray James Prison expansions.
Juvenile division revenues increased 28.2% to $86.0 million for the year
ended December 31, 2000 from $67.1 million for the year ended December 31, 1999
due to (a) the operations of the juvenile facilities and programs acquired from
Interventions - Illinois in November 1999, (b) increased occupancy at the
Cornell Abraxas I facility due to a facility expansion completed in the fourth
quarter of 1999, (c) the opening of the Cornell Abraxas Youth Center late in the
first quarter of 1999, (d) increased occupancy at certain facilities including
the Santa Fe County Juvenile Detention Facility and the Griffin Juvenile
Facility, (e) the opening of the New Morgan Academy in the fourth quarter of
2000, and (f) the addition of various new programs during 1999 including two new
non-residential mental health programs and one new residential mental health
program in Pennsylvania. Revenues attributable to start-up operations were $1.2
million and $432,000, for the years ended December 31, 2000 and 1999,
respectively. For the year ended December 31, 2000, revenues attributable to
start-up operations related primarily to the New Morgan Academy. For the year
ended December 31, 1999, revenues attributable to start-up operations related to
the opening of two new residential facilities and three new non-residential
programs.
-23-
Pre-release division revenues increased 44.4% to $48.9 million for the
year ended December 31, 2000 from $33.8 million for the year ended December 31,
1999 due principally to (a) the operations of the pre-release facilities and
programs acquired from Interventions - Illinois in November 1999, (b) the
opening of a new facility in Nome, Alaska late in the third quarter of 1999 and
(c) increased occupancy at various facilities including the Leidel Comprehensive
Sanctions Center, the Reid Community Correctional Center and the Dallas County
Judicial Treatment Center. Revenues attributable to start-up operations were $0
and $122,000 for the years ended December 31, 2000 and 1999, respectively.
Revenues attributable to start-up operations for the year ended December 31,
1999 related to the new facility in Nome, Alaska.
Operating Expenses. Operating expenses increased 29.1% to $175.4
million for the year ended December 31, 2000 from $135.9 million for the year
ended December 31, 1999. For the years ended December 31, 2000 and 1999,
operating expenses included approximately $3.9 million and $308,000,
respectively, of rent expense resulting from the sale and leaseback of
certain owned furniture and equipment during the fourth quarter of 1999. This
operating rent expense was largely offset by a reduction of depreciation and
interest expense as a result of the sale and leaseback transaction.
Adult secure institutional division operating expenses increased 23.8%
to $68.2 million for the year ended December 31, 2000 from $55.1 million for
the year ended December 31, 1999 due principally to (a) the final 550 bed
expansion of the D. Ray James Prison, which began housing inmates late in the
first quarter of 2000 and reached a full occupancy level late in the second
quarter of 2000, (b) the opening of the additional 450 bed second phase of
the D. Ray James Prison in the first quarter of 1999, (c) increased occupancy
at the Big Spring Complex due to expansions completed in the fourth quarter
of 1999 and the first quarter of 2000 and (d) the opening of the Valencia
County Detention Center in the fourth quarter of 2000. As a percentage of
adult secure institutional division revenues, excluding start-up operations
and the $950,000 license agreement revenue, adult secure institutional
division operating expenses were 75.0% for the year ended December 31, 2000
compared to 70.1% for the year ended December 31, 1999. The 2000 operating
margin was impacted unfavorably due to (a) the sale and leaseback of certain
owned furniture and equipment during the fourth quarter of 1999, (b) a
reduction in occupancy at the Great Plains Correctional Facility offset, in
part, by the expansion of the D. Ray James Prison, (c) a $1.2 million bad
debt provision related to a Santa Fe Adult Detention Facility contract
dispute and (d) a reduction to operating expenses during the year ended
December 31, 1999 of $1.0 million at the Santa Fe Adult Detention Facility
resulting from a cost sharing agreement with the Company's construction
contractor.
Juvenile division operating expenses increased 28.2% to $73.9 million for
the year ended December 31, 2000 from $57.6 million for the year ended December
31, 1999. The increase in operating expenses was due to (a) the juvenile
facilities and programs acquired from Interventions - Illinois in November 1999,
(b) increased occupancy at the Cornell Abraxas I facility due to a facility
expansion completed in the fourth quarter of 1999, (c) the opening of the
Cornell Abraxas Youth Center late in the first quarter of 1999, (d) increased
occupancy at certain facilities including the Santa Fe County Juvenile Detention
Facility and the Griffin Juvenile Facility, (e) the opening of the New Morgan
Academy in the fourth quarter of 2000, and (f) the addition of various programs
including two new non-residential mental health programs and one residential
mental health facility in Pennsylvania. As a percentage of juvenile division
revenues, excluding start-up operations, juvenile division operating expenses
were 85.1% for the year ended December 31, 2000 compared to 85.3% for the year
ended December 31, 1999. The improved operating margin for the year ended
December 31, 2000 compared to the year ended December 31, 1999 was due
principally to the higher occupancy levels and revenue of certain facilities
including Cornell Abraxas I, the Cornell Abraxas Youth Center, the Griffin
Juvenile Facility and the Santa Fe County Juvenile Detention Facility. These
operating margin improvements were offset, in part, by a margin reduction due to
the sale and leaseback of certain owned furniture and equipment during the
fourth quarter of 1999.
-24-
Pre-release division operating expenses increased 39.0% to $36.0 million
for the year ended December 31, 2000 from $25.9 million for the year ended
December 31, 1999 due principally to (a) the pre-release facilities and programs
acquired from Interventions - Illinois in November 1999, (b) the opening of a
new facility in Nome, Alaska late in the third quarter of 1999 and (c) increased
occupancy at various facilities including the Leidel Comprehensive Sanctions
Center, the Reid Community Correctional Center and the Dallas County Judicial
Treatment Center. As a percentage of pre-release division revenues, excluding
start-up operations, pre-release division operating expenses were 73.6% for the
year ended December 31, 2000 compared to 75.4% for the year ended December 31,
1999. The improved operating margin for the year ended December 31, 2000
compared to the year ended December 31, 1999 was due principally to higher
occupancy and revenues at certain facilities. These operating margin
improvements were offset, in part, by margin reductions due to the sale and
leaseback of certain owned furniture and equipment during the fourth quarter of
1999.
Pre-opening and Start-up Expenses. Pre-opening and start-up expenses were
$2.3 million for the year ended December 31, 2000 and were primarily
attributable to the pre-opening and start-up activities of the New Morgan
Academy which opened in the fourth quarter of 2000 and the final 550 bed
expansion at the D. Ray James Prison in the first quarter of 2000. Pre-opening
and start-up expenses were $2.9 million for the year ended December 31, 1999 and
were attributable to the pre-opening and start-up activities of the additional
450 beds in the D. Ray James Prison, the Cornell Abraxas Youth Center during the
first quarter of 1999 and other new juvenile programs in Pennsylvania and a new
pre-release facility in Alaska. Revenues associated with start-up operations
were $1.3 million and $1.5 million for the years ended December 31, 2000 and
1999, respectively.
Depreciation and Amortization. Depreciation and amortization increased
21.1% to $7.3 million for the year ended December 31, 2000 from $6.0 million for
the year ended December 31, 1999 due to (a) depreciation of buildings, furniture
and equipment and amortization of non-compete agreements related to the
acquisition of Interventions - Illinois in November 1999, (b) the completion of
the expansions at the Big Spring Complex, (c) the completion of the additional
450 bed expansion in the first quarter of 1999 and the final 550 bed expansion
in the first quarter of 2000 at the D. Ray James Prison and (d) various facility
expansions. These increases were partially offset due to the sale and leaseback
of certain owned furniture and equipment during the fourth quarter of 1999 and
due to the Company's change in the estimated useful lives of certain adult
secure institutions effective July 1, 1999.
General and Administrative Expenses. General and administrative
expenses increased 21.1% to $12.0 million for the year ended December 31,
2000 from $9.9 million for the year ended December 31, 1999. The increase in
general and administrative expenses resulted principally from the
centralization of certain administrative functions and increases in public
relations efforts and information technology infrastructure. Additionally,
for the years ended December 31, 2000 and 1999, general and administrative
expenses included approximately $820,000 and $93,000 respectively, of rent
expense resulting from the sale and leaseback of certain owned furniture and
equipment during the fourth quarter of 1999. This rent expense was largely
offset by a reduction of depreciation and interest expense. Excluding the
rent expense resulting from the 1999 sale and leaseback of certain furniture
and equipment, general and administrative expenses for the year ended
December 31, 2000 increased 13.9% compared to the year ended December 31,
1999.
Interest. Interest expense, net of interest income, increased to $15.6
million for the year ended December 31, 2000 from $8.4 million for the year
ended December 31, 1999 due principally to (a) increased borrowings to fund
the acquisition of Interventions - Illinois in November 1999, various
facility expansions and the associated increases in working capital and (b)
increases in base interest rates and the Company's interest rate margin on
its 2000 Credit Facility (see Note 6 to the Consolidated Financial
Statements). Capitalized interest for the year ended December 31, 2000 was
$40,000 and related to an expansion at the Big Spring Complex. During the
year ended December 31, 1999, the Company capitalized interest totaling $1.2
million related principally to costs for construction of the D. Ray James
Prison.
-25-
Income Taxes. For the year ended December 31, 2000 and 1999, the Company
recognized a provision for income taxes at an estimated effective rate of 41%
and 40%, respectively. The increase in the estimated effective tax rate for the
year ended December 31, 2000 as compared to the year ended December 31, 1999 was
due primarily to increased taxable income in certain higher taxing states.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues. Revenues increased 43.7% to $177.0 million for the year ended
December 31, 1999 from $123.1 million for the year ended December 31, 1998.
Adult secure institutional division revenues increased 44.4% to $76.0
million for the year ended December 31, 1999 from $52.6 million for the year
ended December 31, 1998 due principally to (a) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during the fourth quarter of 1999, (b)
the opening of the 550 initial beds in the D. Ray James Prison in the fourth
quarter of 1998 and an additional 450 beds in the first quarter of 1999 and (c)
the opening of the 661 bed Santa Fe County Adult Detention Facility in the third
quarter of 1998. Revenues attributable to start-up operations for the Big Spring
Complex and D. Ray James Prison expansions were approximately $866,000 for the
year ended December 31, 1999.
Juvenile division revenues increased 42.7% to $67.1 million for the year
ended December 31, 1999 from $47.0 million for the year ended December 31, 1998
due to (a) the opening of the Santa Fe County Juvenile Detention Facility in the
third quarter of 1998, (b) increased occupancy at the Cornell Abraxas I and
Cornell Abraxas of Ohio facilities due to facility expansions completed in the
third quarter of 1998, (c) the opening of the Danville Center for Adolescent
Females in the second quarter of 1998 and the Cornell Abraxas Youth Center late
in the first quarter of 1999, (d) the acquisition of Interventions-Illinois
during the fourth quarter of 1999, (e) increased occupancy at the Campbell
Griffin Facility in San Antonio, Texas and (f) the addition of various new
programs including two new non-residential mental health programs in
Pennsylvania. Revenues attributable to start-up operations were approximately
$432,000 for the year ended December 31, 1999.
Pre-release division revenues increased 44.2% to $33.8 million for the
year ended December 31, 1999 from $23.5 million for the year ended December 31,
1998 due principally to a full year of operations of five pre-release centers in
Alaska acquired in August 1998 and the acquisition of Interventions-Illinois
during the fourth quarter of 1999. Revenues attributable to start-up operations
were approximately $122,000 for the year ended December 31, 1999 and related to
a new facility in Alaska.
Operating Expenses. Operating expenses increased 37.6% to $135.9 million
for the year ended December 31, 1999 from $98.7 million for the year ended
December 31, 1998.
Adult secure institutional division operating expenses increased 45.8% to
$55.1 million for the year ended December 31, 1999 from $37.8 million for the
year ended December 31, 1998 due principally to (a) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during the fourth quarter of 1999, (b)
the opening of the 550 initial beds at the D. Ray James Prison in the fourth
quarter of 1998 and an additional 450 beds in the first quarter of 1999 and (c)
the opening of the 661 bed Santa Fe County Adult Detention Facility in the third
quarter of 1998. As a percentage of adult secure institutional division
revenues, excluding start-up operations, adult secure institutional division
operating expenses were 70.1% for the year ended December 31, 1999 compared to
71.9% for the year ended December 31, 1998. The improved operating margin was
due principally to a greater mix of owned versus leased facilities and a
reduction to operating expenses of $1.0 million at the Santa Fe County Adult
Detention Facility resulting from a cost-sharing agreement with the Company's
construction contractor (See Note 3 to the Consolidated Financial Statements).
-26-
Juvenile division operating expenses increased 39.8% to $57.6 million for
the year ended December 31, 1999 from $41.2 million for the year ended December
31, 1998. The increase in operating expenses was due to (a) the Santa Fe County
Juvenile Detention Facility which began operations late in the third quarter of
1998, (b) increased occupancy at the Cornell Abraxas I and Cornell Abraxas of
Ohio facilities due to facility expansions completed in the third quarter of
1998, (c) the Cornell Abraxas Youth Center which began operations late in the
first quarter of 1999 and the Danville Center for Adolescent Females which began
operations in the second quarter of 1998, (d) the acquisition of
Interventions-Illinois during the fourth quarter of 1999, (e) increased
occupancy at the Campbell Griffin Facility in San Antonio, Texas and (f) the
addition of new programs including two new non-residential mental health
programs in Pennsylvania. As a percentage of juvenile division revenues,
excluding start-up operations, operating expenses were 85.3% for the year ended
December 31, 1999 compared to 87.7% for the year ended December 31, 1998. The
improved operating margin was due principally to improved results from certain
expanded residential facilities.
Pre-release division operating expenses increased 38.5% to $25.9 million
for the year ended December 31, 1999 from $18.7 million for the year ended
December 31, 1998 due principally to the acquisition of five pre-release centers
in Alaska in August 1998 and the acquisition of Interventions-Illinois during
the fourth quarter of 1999. As a percentage of pre-release division revenues,
excluding start up operations, operating expenses were 75.4% for the year ended
December 31, 1999 compared to 79.8% for the year ended December 31, 1998. The
improved operating margin was due principally to a greater mix of owned versus
leased facilities, including four owned facilities in Alaska.
Pre-opening and Start-up Expenses. Pre-opening and start-up expenses were
$2.9 million for the year ended December 31, 1999 and were primarily
attributable to the pre-opening and start-up activities of the additional 450
beds during the first and second quarters of 1999 at the D. Ray James Prison,
the Cornell Abraxas Youth Center during the first quarter of 1999 and other new
juvenile programs in Pennsylvania and a new pre-release facility in Alaska.
Depreciation and Amortization. Depreciation and amortization increased
42.1% to $6.0 million for the year ended December 31, 1999 from $4.2 million for
the year ended December 31, 1998 due to (a) depreciation of buildings and
equipment acquired in Alaska in August 1998, (b) the opening of the 560 bed
expansion unit at the Big Spring Complex in the fourth quarter of 1998 and
additional Big Spring Complex expansions during 1999, (c) the phase in of 1,550
beds in the D. Ray James Prison from the fourth quarter of 1998 through the
fourth quarter of 1999 and (d) various facility expansions and related
equipment. Effective July 1, 1999, the lease term for the three original Big
Spring Complex units was extended from an average of 35 years to 50 years. At
this date, management revised its estimated useful lives of the Big Spring
Complex and two other secure institutions to 50 years. The effect of this change
reduced building depreciation and prepaid facility use amortization by
approximately $300,000 for the year ended December 31, 1999.
General and Administrative Expenses. General and administrative expenses
increased 31.0% to $9.9 million for the year ended December 31, 1999 from $7.6
million for the year ended December 31, 1998. The increase in general and
administrative expenses resulted principally from additional corporate
executive, business development and administrative personnel, overhead and
travel to manage the increased business of the Company and for the development
of new contracts.
Interest. Interest expense, net of interest income, increased to $8.4
million for the year ended December 31, 1999 from $2.5 million for the year
ended December 31, 1998 due principally to increased borrowings to finance (a)
the acquisition of the Alaskan assets in August 1998, (b) construction costs of
new facilities and expansions including the 560 bed Big Spring Complex expansion
unit in 1998, additional Big Spring Complex expansions in 1999 and the 1,550 bed
D. Ray James Prison and (c) the acquisition of Interventions-Illinois in the
fourth quarter of 1999. For the year ended December 31, 1999, the Company
capitalized
-27-
interest totaling $1.2 million related principally to costs for construction of
the D. Ray James Prison expansions and other facility expansions.
Income Taxes. For the years ended December 31, 1999 and 1998, the Company
recognized a provision for income taxes at an estimated effective rate of 40%.
Accounting Change. The Company adopted SOP 98-5 in January 1999 and
recorded a net-of-tax charge of approximately $3.0 million for the cumulative
effect of a change in accounting principle.
Liquidity and Capital Resources
General. The Company's primary capital requirements are for (a)
construction of new facilities, (b) acquisitions, (c) expansions of existing
facilities, (d) working capital, (e) start-up costs related to new operating
contracts, (f) information systems hardware and software and (g) furniture,
fixtures and equipment. Working capital requirements generally increase
immediately prior to the Company commencing management of a new facility as the
Company incurs start-up costs and purchases necessary equipment and supplies
before facility management revenue is realized.
New Facilities and Projects Under Construction. A majority of the New
Morgan Academy was completed and became operational during the fourth quarter of
2000. A portion of the New Morgan Academy remained under construction at
December 31, 2000 and was completed in the first quarter of 2001. In April 1999,
the Company was awarded a contract to design, build and operate a 1,095 bed
prison for the Federal Bureau of Prisons ("FBOP") in Moshannon Valley,
Pennsylvania ("Moshannon Valley Correctional Center"). Construction and
activation activities commenced immediately. In June 1999, the FBOP issued a
Stop-Work Order pending a re-evaluation of their environmental documentation
supporting the decision to award the contract. The environmental study was
completed with a finding of no significant impact. While the Stop-Work Order
remains in effect, management of the Company believes it will be lifted and
construction will be resumed in the near-term. Development and construction
costs for the New Morgan Academy and the Moshannon Valley Correctional Center
have been financed with the Company's lease financing arrangement discussed
below under "Long-Term Credit Facilities".
Long-Term Credit Facilities. Effective July 21, 2000, the Company
formalized terms under the 2000 Credit Facility with a group of financial
institutions. The 2000 Credit Facility provides for borrowings of up to $75.0
million under a revolving line of credit. The revolving credit commitment is
reduced by $2.7 million quarterly beginning in January 2002. The 2000 Credit
Facility matures in July 2005 and bears interest, at the election of the
Company, at either the prime rate plus a margin of 1.0% to 2.0%, or a rate which
is 2.0% to 3.0% above the applicable LIBOR rate, depending on the level of
borrowings. At December 31, 2000, the margin was 3.0% above the LIBOR rate. The
2000 Credit Facility is secured by substantially all of the Company's assets,
including the stock of all of the Company's subsidiaries; does not permit the
payment of cash dividends; and requires the Company to comply with certain
leverage, net worth and debt service coverage covenants. At February 28, 2001,
the Company had $63.5 million outstanding under the revolving line of credit,
therefore the remaining borrowing capacity was $11.5 million.
Additionally, the 2000 Credit Facility provides the Company with an
increased capacity to enter into operating lease agreements for the acquisition
or development of operating facilities. This lease financing arrangement
provides for funding to the lessor under the operating leases of up to $100.0
million, of which approximately $48.0 million had been utilized as of February
28, 2001. The remaining capacity under this lease financing arrangement is
expected to be utilized to complete the Moshannon Valley Correctional Center.
The leases under this arrangement have a term of five years, include purchase
and renewal options, and provide for residual value guarantees for each lease
which average 81.4% of the total cost and would be due by the Company upon
termination of the leases. Upon termination of a lease, the Company could either
exercise a purchase option or the facilities could be sold to a third party. The
Company believes the fair value of the leased facilities will equal or exceed
the residual guaranteed amounts. Lease payments under the lease financing
arrangement are variable and are adjusted for changes in interest rates.
-28-
Concurrent with the closing of the 2000 Credit Facility, the Company's
$50.0 million Subordinated Bridge Loan Agreement was refinanced with proceeds
from a Note and Equity Purchase Agreement ("Subordinated Notes"). The
Subordinated Notes have a seven-year term and are interest-only, which is
payable quarterly at a fixed rate of 12.875%. In conjunction with the issuance
of the Subordinated Notes, the Company issued warrants to purchase 290,370
shares of the common stock at an exercise price of $6.70. The warrants may only
be exercised by a full payment of cash to the Company of the exercise price or
by the cancellation of Company indebtedness to the warrant holder.
The Company has outstanding $50.0 million of Senior Secured Notes (the
"Senior Notes"). The Senior Notes bear interest at a fixed rate of 7.74% and
mature on July 15, 2010. Under the Senior Notes purchase agreements, the Company
is required to make eight annual principal payments of $6.25 million beginning
July 15, 2003 and comply with certain financial covenants. Earlier payments of
principal are allowed subject to prepayment provisions. Interest is payable
semi-annually. The holders of the Senior Notes and the lenders under the 2000
Credit Facility have a collateral-sharing agreement whereby both sets of
creditors have an equal security interest in all of the assets of the Company.
Cash Flows From Operating Activities. For the year ended December 31,
2000, the Company reported net cash provided by operating activities of $9.6
million. Cash provided by operating activities was reduced by approximately $1.9
million due to the November 1999 acquisition of Interventions - Illinois which
did not include working capital.
Deferred Costs and Other. At December 31, 2000, the Company had deferred
professional fees and other costs totaling $1.8 million related to its efforts
on a facility sale and leaseback transaction. Upon consummation of this
transaction, the transaction costs will be included in the determination of the
gain from the sale which will be deferred over the initial lease term. If
management of the Company determines that it is doubtful that this transaction
will be consummated, these transaction costs will be expensed in the period such
determination is made. See Note 1 to the Consolidated Financial Statements.
At December 31, 2000, the Company had deferred acquisition costs totaling
$628,000 related to the anticipated purchase of real property in Fort Greely,
Alaska. Management anticipates that this property will be used in conjunction
with the operations of an adult secure institution for the State of Alaska. If
management determines that a contract to operate this facility in Fort Greely,
Alaska will not be awarded, the Company will likely not purchase the real
property and the deferred acquisition costs will be expensed. See Note 1 to the
Consolidated Financial Statements.
At December 31, 2000, accounts receivable include costs totaling $1.1
million for direct costs incurred by the Company since June 1999 for payroll and
other operating costs related to the Moshannon Valley Correctional Center since
the issuance of the Stop-Work Order. These costs were incurred at the direction
of the FBOP with the understanding that such costs would be reimbursed. Although
no formal written agreement exists, management believes that these costs will be
reimbursed by the FBOP. In the event any portion of these costs are not
reimbursed by the FBOP, such costs will be expensed.
Capital expenditures. Capital expenditures for the year ended December
31, 2000 were $12.1 million and related principally to (a) an expansion of
the Big Spring Complex, (b) the purchase of a building in Pennsylvania, (c)
purchases of furniture and equipment for the New Morgan Academy, and (d)
certain software development costs.
Management believes that the cash flows generated from operations,
together with the credit available under the 2000 Credit Facility and the
operating lease capacity thereunder, will provide sufficient liquidity to meet
the Company's committed capital and working capital requirements for currently
awarded contracts. It is not anticipated that the current financing arrangements
will provide sufficient financing to fund construction costs related to future
adult secure institutional contract awards, or significant expansions or
acquisitions. The Company anticipates obtaining additional sources of financing
to fund such activities.
-29-
Inflation
Other than personnel and offender medical costs at certain facilities
during 2000, management believes that inflation has not had a material effect on
its results of operations during the past three years. Most of the Company's
facility management contracts provide for payments to the Company of either
fixed per diem fees or per diem fees that increase by only small amounts during
the terms of the contracts. Inflation could substantially increase the Company's
personnel costs (the largest component of operating expenses) or other operating
expenses at rates faster than any increases in contract revenues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, the Company is exposed to market risk,
primarily from changes in interest rates. The Company continually monitors
exposure to market risk and develops appropriate strategies to manage this risk.
The Company is not exposed to any other significant market risks, including
commodity price risk, foreign currency exchange risk or interest rate risks from
the use of derivative financial instruments. Management does not use derivative
financial instruments for trading or to speculate on changes in interest rates
or commodity prices.
Interest Rate Exposure
The Company's exposure to changes in interest rates primarily results from
its long-term debt with both fixed and floating interest rates. The Company's
debt with fixed interest rates consists of the Senior Notes and the Subordinated
Notes. At December 31, 2000, approximately 39% ($58.0 million outstanding under
the Company's revolving line of credit) of the Company's long-term debt was
subject to variable interest rates. Additionally, the Company had a subordinated
bridge loan facility with a variable interest rate until the facility was
refinanced with the Subordinated Notes in July 2000. The detrimental effect of a
hypothetical 100 basis point increase in interest rates would be to reduce
income before provision for income taxes by approximately $830,000 for the year
ended December 31, 2000. At December 31, 2000, the fair value of the Company's
fixed rate debt approximated carrying value based upon discounted future cash
flows using current market prices.
Forward Looking Statement Disclaimer
This annual report may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements are based on current plans and expectations of management and involve
risks and uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results to
differ include, among others, (a) risks associated with acquisitions and the
integration thereof (including the ability to achieve administrative and
operating cost savings and anticipated synergies), (b) the timing and costs of
expansions of existing facilities, (c) changes in governmental policy to
eliminate or discourage the privatization of correctional, detention and pre-
release services in the United States, (d) availability of debt and equity
financing on terms that are favorable to the Company, (e) fluctuations in
operating results because of occupancy, competition (including competition from
two competitors that are substantially larger than the Company) , increases in
cost of operations, fluctuations in interest rates and risks of operations and
(f) significant charges to operating expense of deferred costs associated with
financing and other projects in development if management determines that one or
more of such projects is unlikely to be successfully concluded.
-30-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cornell Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Cornell
Companies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cornell Companies, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 1, 2001
-31-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31,
----------------------
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 620 $ 1,763
Accounts receivable (net of allowance for doubtful accounts
of $2,578 and $3,002, respectively) ..................................... 55,262 48,092
Deferred tax assets ....................................................... 667 1,206
Prepaids and other ........................................................ 4,363 1,356
Restricted assets ......................................................... 2,011 2,339
--------- ---------
Total current assets .................................................. 62,923 54,756
PROPERTY AND EQUIPMENT, net .................................................... 201,683 194,498
OTHER ASSETS:
Intangible assets, net .................................................... 16,861 18,270
Deferred costs and other .................................................. 9,972 5,524
Deferred tax assets ....................................................... -- 943
--------- ---------
Total assets .......................................................... $ 291,439 $ 273,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .................................. $ 33,179 $ 27,392
Note payable .............................................................. -- 40,000
Current portion of long-term debt ......................................... 41 --
--------- ---------
Total current liabilities ............................................. 33,220 67,392
LONG-TERM DEBT, net of current portion ......................................... 146,926 101,500
DEFERRED TAX LIABILITIES ....................................................... 643 --
OTHER LONG-TERM LIABILITIES .................................................... 6,330 7,891
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 10,000,000 shares authorized,
none outstanding ........................................................ -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
10,161,113 and 10,137,528 shares issued and outstanding, respectively ... 10 10
Additional paid-in capital ................................................ 91,625 90,394
Notes from shareholders ................................................... (609) (455)
Retained earnings ......................................................... 19,227 11,258
Treasury stock (955,500 and 697,100 shares at cost, respectively) ......... (5,933) (3,999)
--------- ---------
Total stockholders' equity ............................................ 104,320 97,208
--------- ---------
Total liabilities and stockholders' equity ............................ $ 291,439 $ 273,991
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-32-
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
REVENUES ..................................................... $ 226,050 $ 176,967 $ 123,119
OPERATING EXPENSES ........................................... 175,391 135,850 98,721
PRE-OPENING AND START-UP EXPENSES ............................ 2,298 2,929 --
DEPRECIATION AND AMORTIZATION ................................ 7,276 6,007 4,228
GENERAL AND ADMINISTRATIVE EXPENSES .......................... 12,024 9,932 7,581
--------- --------- ---------
INCOME FROM OPERATIONS ....................................... 29,061 22,249 12,589
INTEREST EXPENSE ............................................. 15,654 8,522 2,601
INTEREST INCOME .............................................. (100) (117) (116)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .................. 13,507 13,844 10,104
PROVISION FOR INCOME TAXES ................................... 5,538 5,538 4,042
--------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ............................ 7,969 8,306 6,062
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF RELATED INCOME TAX
BENEFIT OF $1,969 IN 1999 ................................. -- 2,954 --
--------- --------- ---------
NET INCOME ................................................... $ 7,969 $ 5,352 $ 6,062
========= ========= =========
EARNINGS (LOSS) PER SHARE:
BASIC
Income before cumulative effect of change
in accounting principle ............................ $ .85 $ .88 $ .64
Cumulative effect of change in accounting principle ... -- (.31) --
--------- --------- ---------
Net income ............................................ $ .85 $ .57 $ .64
--------- ========= =========
DILUTED
Income before cumulative effect of change
in accounting principle ............................ $ .84 $ .86 $ .62
Cumulative effect of change in accounting principle ... -- (.31) --
--------- --------- ---------
Net income ............................................ $ .84 $ .55 $ .62
========= ========= =========
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
BASIC ................................................... 9,383 9,432 9,442
DILUTED ................................................. 9,495 9,660 9,772
The accompanying notes are an integral part of these consolidated
financial statements.
-33-
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock
--------------------- Additional Notes Retained
Par Paid-In From Earnings Treasury
Shares Value Capital Shareholders (Deficit) Stock
---------- ------ ------- ------------ -------- -------
BALANCES AT DECEMBER 31, 1997 9,945,904 $ 10 $89,684 $ (455) $ (156) $(2,353)
EXERCISE OF STOCK OPTIONS .... 160,012 -- 176 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED ......... -- -- 178 -- -- --
PURCHASE OF TREASURY STOCK
(142,100 SHARES, AT COST) . -- -- -- -- -- (1,646)
NET INCOME ................... -- -- -- -- 6,062 --
---------- ------ ------- ------ -------- -------
BALANCES AT DECEMBER 31, 1998 10,105,916 10 90,038 (455) 5,906 (3,999)
EXERCISE OF STOCK OPTIONS .... 31,612 -- 217 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED ......... -- -- 139 -- -- --
NET INCOME .................. -- -- -- -- 5,352 --
---------- ------ ------- ------ -------- -------
BALANCES AT DECEMBER 31, 1999 10,137,528 10 90,394 (455) 11,258 (3,999)
EXERCISE OF STOCK OPTIONS .... 10,000 -- 24 -- -- --
INCOME TAX BENEFITS FROM STOCK
OPTIONS EXERCISED ......... -- -- 15 -- -- --
PURCHASE OF TREASURY STOCK
(258,400 SHARES AT COST) .. -- -- -- -- -- (1,934)
ISSUANCE OF COMMON STOCK ..... 13,585 -- 97 -- -- --
ISSUANCE OF STOCK WARRANTS ... -- -- 1,095 -- -- --
ACCRUED INTEREST ON NOTES FROM
SHAREHOLDERS .............. -- -- -- (154) -- --
NET INCOME .................. -- -- -- -- 7,969 --
---------- ------ ------- ------ -------- -------
BALANCES AT DECEMBER 31, 2000 10,161,113 $ 10 $91,625 $ (609) $ 19,227 $(5,933)
========== ====== ======= ====== ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
-34-
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 7,969 $ 5,352 $ 6,062
Adjustments to reconcile net income to net cash provided by (used in)
operating activities --
Cumulative effect of change in accounting principle .................. -- 2,954 --
Depreciation ......................................................... 4,178 4,601 2,880
Amortization ......................................................... 3,097 1,406 1,348
Non-cash interest expense ............................................ 1,224 511 210
Provision for bad debts .............................................. 2,416 1,025 509
(Gain)loss on sale of property and equipment ......................... 13 (305) --
Deferred income taxes ................................................ 2,125 (1,741) 2,106
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable .............................................. (9,740) (21,553) (7,936)
Restricted assets ................................................ 328 (319) (1,049)
Other assets ..................................................... (5,442) (1,340) (4,768)
Accounts payable and accrued liabilities ......................... 5,023 10,006 4,249
Other liabilities ................................................ (1,561) (1,478) (1,205)
--------- --------- ---------
Net cash provided by (used in) operating activities .................. 9,630 (881) 2,406
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment .......................... 719 19,278 --
Capital expenditures ................................................... (12,096) (29,067) (49,483)
Acquisition of businesses, less cash acquired .......................... -- (31,786) (65,096)
--------- --------- ---------
Net cash used in investing activities ................................ (11,377) (41,575) (114,579)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ............................................ -- 69,335 --
Payments on note payable ............................................... (40,000) (29,335) --
Proceeds from long-term debt ........................................... 155,000 53,194 176,379
Payments on long-term debt ............................................. (108,500) (50,174) (78,331)
Payments on capital lease obligations .................................. (10) -- --
Payments for debt issuance costs ....................................... (4,073) (1,676) (1,032)
Proceeds from issuance of common stock ................................. 97 -- --
Proceeds from exercise of stock options ................................ 24 356 354
Purchases of treasury stock ............................................ (1,934) -- (1,646)
--------- --------- ---------
Net cash provided by financing activities ............................ 604 41,700 95,724
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (1,143) (756) (16,449)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 1,763 2,519 18,968
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 620 $ 1,763 $ 2,519
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid, net of amounts capitalized .............................. $ 15,588 $ 7,956 $ 765
========= ========= =========
Income taxes paid ...................................................... $ 8,619 $ 3,964 $ 3,341
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
-35-
CORNELL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cornell Companies, Inc. (previously Cornell Corrections, Inc. and
collectively with its subsidiaries, the "Company"), a Delaware corporation,
provides to governmental agencies the integrated development, design,
construction and management of facilities within three operating divisions: (i)
adult secure institutional correctional and detention services, (ii) juvenile
treatment, educational and detention services and (iii) pre-release correctional
and treatment services.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Accounts Receivable
The Company increased its allowance for doubtful accounts during the years
ended December 31, 2000, 1999 and 1998 by $2.4 million, $1.0 million and
$509,000, respectively. Write-offs totaling $2.8 million, $1.2 million and
$12,000 were charged against the allowance during the periods ended December 31,
2000, 1999 and 1998, respectively.
At December 31, 2000, accounts receivable include costs totaling $1.1
million for direct costs incurred by the Company since June 1999 for payroll and
other operating costs related to the Moshannon Valley Correctional Center since
the issuance of a Stop-Work Order by the Federal Bureau of Prisons ("FBOP").
These costs were incurred at the direction of the FBOP with the understanding
that such costs would be reimbursed. Although no formal written agreement
exists, management believes that these costs will be reimbursed by the FBOP. In
the event any portion of these costs are not reimbursed by the FBOP, such costs
will be expensed.
Restricted Assets
For certain facilities, the Company maintains bank accounts for restricted
cash belonging to offenders or residents, commissary operations, an equipment
replacement fund used in state programs and a restoration fund for certain
facilities. These bank accounts and commissary inventories are collectively
referred to as restricted assets and the corresponding obligations are included
in accrued expenses in the accompanying financial statements.
Change in Accounting for Supplies Inventory (Unaudited)
In fiscal year 2001, management plans to change its method of accounting
for supplies whereby the Company will capitalize durable operating supplies'
purchases such as uniforms, linens and books and amortize these costs to
operating expense over the estimated period of benefit of 18 months. Effective
January 1, 2001, the Company expects to capitalize a portion of previously
expensed supplies and recognize a benefit in the consolidated statements of
operations of approximately $770,000 (net of income taxes of $535,000) for a
cumulative effect of a change in accounting principle.
Property and Equipment
Property and equipment are recorded at cost. Ordinary maintenance and
repair costs are expensed, while renewal and betterment costs are capitalized.
Prepaid facility use cost, which resulted from the July 1996 acquisition of the
Big Spring Complex and the December 1999 transfer of ownership of the Great
Plains
-36-
Correctional Facility to a leasehold interest, is being amortized over 50 years
using the straight-line method. Buildings and improvements are depreciated over
their estimated useful lives of 30 to 50 years using the straight-line method.
Furniture and equipment are depreciated over their estimated useful lives of 3
to 10 years using the straight-line method. Amortization of leasehold
improvements is recorded using the straight-line method based upon the shorter
of the life of the asset or the term of the respective lease.
Capitalized Interest
The Company capitalizes interest on facilities under development and
construction. Interest capitalized for the years ended December 31, 2000, 1999
and 1998 was $40,000, $1.2 million and $2.3 million, respectively.
Intangible Assets
Goodwill represents the excess of the cost of acquired businesses over the
fair value of the net tangible and identified intangible assets. Goodwill is
amortized using the straight-line method over 20 years, which represents
management's estimation of the related benefit to be derived from the acquired
businesses. The carrying value of goodwill is reviewed periodically if events
and circumstances suggest that it may be permanently impaired. If the review
indicates that goodwill will not be recoverable, as determined by the
undiscounted cash flow method, the asset will be reduced to its estimated
recoverable value. Accumulated amortization of goodwill was $3.7 million and
$3.0 million as of December 31, 2000 and 1999, respectively.
Non-compete agreements have been obtained primarily through
acquisitions of businesses and are amortized over periods of 9 to 10 years
using the straight-line method. Accumulated amortization of non-compete
agreements was $1.2 million and $324,000 at December 31, 2000 and 1999,
respectively.
Intangible assets were as follows (in thousands):
December 31,
----------------------
2000 1999
--------- ---------
Goodwill ............................ $ 13,658 $ 13,658
Non-compete agreements .............. 8,060 7,940
--------- ---------
21,718 21,598
Accumulated amortization ............ (4,857) (3,328)
--------- ---------
$ 16,861 $ 18,270
========= =========
Deferred Costs
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires
entities to expense start-up costs as incurred and to expense previously
capitalized start-up costs as a cumulative effect of a change in accounting
principle in the year adopted. In January 1999, the Company adopted SOP 98-5 and
recorded a net of tax charge of $3.0 million for the cumulative effect of a
change in accounting principle.
Costs incurred related to obtaining credit financing are capitalized and
amortized over the term of the related indebtedness. At December 31, 2000, the
Company had net deferred debt issuance costs of approximately $5.3 million
related to its credit facilities. At December 31, 2000, the Company had deferred
professional fees and other costs totaling $1.8 million related to its efforts
on a facility sale and leaseback transaction. Upon consummation of this
transaction, the transaction costs will be included in the determination of the
gain from the sale which will be deferred over the initial lease term. If
management determines that it is doubtful that this transaction will be
consummated, these transaction costs will be expensed in the period such
determination is made.
At December 31, 2000, the Company had deferred acquisition costs totaling
$628,000 related to the anticipated purchase of real property in Fort Greely,
Alaska. Management anticipates that this property will
-37-
be used in conjunction with the operations of an adult secure institution for
the State of Alaska. If management determines that a contract to operate this
facility in Fort Greely, Alaska will not be awarded to the Company, the Company
will likely not purchase the real property and the deferred acquisition costs
will be expensed.
Realization of Long-Lived Assets
Statement of Financial Accounting Standard ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed Of," requires that long-lived assets be probable of future
recovery in their respective carrying amounts as of each balance sheet date.
Management of the Company believes its long-lived assets are realizable and
that an impairment allowance is not necessary as of December 31, 2000
pursuant to the provisions of SFAS No. 121.
Revenue Recognition
Substantially all revenues are derived from contracts with federal, state
and local governmental agencies, which pay either per diem rates based upon the
number of occupant days or hours served for the period or cost-plus
reimbursement. Revenues are recognized as services are provided. Deferred
revenues result from advances or prepayments from agencies for future services
to be provided.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB No. 101"), which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB No. 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. Management believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
as required by SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying values of existing assets and liabilities and their respective tax
bases based on enacted tax rates.
Use of Estimates
The Company's financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). Financial statements prepared
in accordance with GAAP require the use of management estimates and assumptions
that affect the reported amounts of assets and liabilities, and the disclosure
of contingent assets and liabilities at the date of the financial statements.
Additionally, management estimates affect the reported amounts of revenues and
expenses in the reporting period. Actual results could differ from those
estimates. The significant estimates made by management in the accompanying
financial statements include the allowance for doubtful accounts and accruals
for insurance and legal costs.
Business Concentration
Contracts with federal, state and local governmental agencies account for
nearly all of the Company's revenues. The loss of, or a significant decrease in,
business from one or more of these governmental agencies could have a material
adverse effect on the Company's financial condition and results of operation.
For the years ended December 31, 2000, 1999 and 1998, 18.5%, 19.8% and 20.1%,
respectively, of the Company's consolidated revenues were derived from contracts
with the FBOP.
Financial Instruments
The Company considers the fair value of all its financial instruments not
to be materially different from their reported carrying values at the end of
each year based on management's estimate of the Company's ability to borrow
funds under terms and conditions similar to those of the Company's existing
debt.
-38-
Accounting for Stock-Based Compensation
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," certain pro forma disclosures are provided in Note 8 to the
Consolidated Financial Statements.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS reflects the potential dilution from the exercise or conversion of
securities, such as stock options and warrants, into common stock.
2. ACQUISITIONS
1999 Acquisitions
In November 1999, the Company acquired certain of the adult and juvenile
behavioral health and correctional assets of Interventions, a not-for-profit
corporation headquartered in Chicago, Illinois, and BHS Consulting Corporation
("BHS"), a for-profit firm that provides management services to Interventions.
The assets acquired included more than 30 programs provided throughout Illinois
and the real properties of seven facilities. The aggregate purchase price for
the transactions was approximately $31.8 million including transaction costs.
The Company financed the transaction with borrowings under a bridge loan. See
Note 6 to the Consolidated Financial Statements.
The acquisition costs and the estimated fair market value of the aggregate
assets acquired and liabilities assumed associated with the Interventions and
BHS acquisitions were as follows (in thousands):
Cash paid .............................................. $ 30,889
Transaction costs ...................................... 897
---------
Total purchase price ............................... $ 31,786
=========
Net assets acquired --
Prepaids and other current assets .................... $ 69
Property and equipment ............................... 23,883
Intangible assets .................................... 8,735
Accrued liabilities .................................. (901)
---------
$ 31,786
=========
The Company's acquisitions have been accounted for as purchases; therefore,
the accompanying statements of operations reflect the results of operations
since the respective dates.
The unaudited consolidated results of operations on a pro forma basis as
though the 1999 acquisitions had occurred as of the beginning of the Company's
fiscal year 1999 were as follows (in thousands, except per share data):
Total revenues ......................................... $ 195,945
Net income ............................................. 3,237
Net earnings per share
- Basic .............................................. .34
- Diluted ............................................ .34
-39-
3. PROPERTY AND EQUIPMENT
Property and equipment were as follows (in thousands):
December 31,
----------------------
2000 1999
--------- ---------
Land ........................................ $ 20,694 $ 19,929
Prepaid facility use ........................ 68,237 66,894
Buildings and improvements .................. 115,872 108,605
Furniture and equipment ..................... 7,129 2,378
Construction in progress .................... 4,487 5,838
--------- ---------
216,419 203,644
Accumulated depreciation and amortization ... (14,736) (9,146)
--------- ---------
$ 201,683 $ 194,498
========= =========
Construction in progress at December 31, 2000, consisted primarily of
construction costs attributable to an expansion of the Big Spring Complex.
The Company utilizes an unrelated privately owned construction company
("Construction Contractor") as its preferred contractor for construction
projects. The Construction Contractor has received contracts to construct
facilities, which the Company owns and/or operates, totaling approximately $3.5
million, $68.5 million and $20.4 million during the years ended December 31,
2000, 1999 and 1998, respectively. Management believes the Company is a
substantial customer of the Construction Contractor. During the fourth quarter
of 2000, the Company entered into a license agreement with this construction
contractor that conveyed certain rights to the design of an adult secure
institution. A non-recurring license agreement payment of $950,000 was
recognized as revenue by the Company. The Company has not licensed such designs
in prior years and does not expect to generate significant revenues from such
activity in future periods. During the year ended December 31, 1999, this
Construction Contractor paid the Company $1.0 million related to a cost-sharing
agreement in connection with the operations of the Santa Fe County Adult
Detention Facility because the operating margins had not reached certain levels
until June 1999. These cost-sharing payments were reported by the Company as a
reduction of operating expenses. The Construction Contractor has no obligation
to make any further cost-sharing payments.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following (in
thousands):
December 31,
---------------------
2000 1999
--------- ---------
Accounts payable ............................ $ 16,557 $ 8,974
Accrued compensation expense ................ 6,701 4,764
Accrued interest payable .................... 2,484 2,418
Other ....................................... 7,437 11,236
--------- ---------
$ 33,179 $ 27,392
========= =========
-40-
5. INCOME TAXES
The following is an analysis of the Company's deferred tax assets and
liabilities (in thousands):
December 31,
----------------------
2000 1999
----------------------
Deferred tax assets:
Depreciation and amortization ............. $ 531 $ 2,045
Accrued expenses .......................... 1,667 1,935
Deferred compensation ..................... 325 339
Other ..................................... 515 303
--------- ---------
3,038 4,622
--------- ---------
Deferred tax liabilities:
Amortization of intangible assets ......... 18 89
Prepaid facility use amortization ......... 1,332 931
Prepaid expenses .......................... 422 341
Other ..................................... 1,242 1,112
--------- ---------
3,014 2,473
--------- ---------
Net deferred tax asset .................... $ 24 $ 2,149
========= =========
The components of the Company's income tax provision were as follows (in
thousands):
Year Ended December 31,
---------------------------
2000 1999 1998
------ ------- -------
Current provision ............................ $3,413 $ 7,279 $ 1,936
Deferred provision (benefit) ................. 2,125 (1,741) 2,106
------ ------- -------
Tax provision .............................. $5,538 $ 5,538 $ 4,042
====== ======= =======
The following is a reconciliation of taxes at the federal statutory rate to
the income tax provision recorded by the Company (in thousands):
Year Ended December 31,
---------------------------
2000 1999 1998
------ ------- -------
Computed taxes at statutory rate ............. $4,728 $ 4,846 $ 3,536
Amortization of non-deductible intangibles ... 129 119 119
State income taxes, net of federal benefit ... 460 369 399
Changes in valuation allowance ............... -- -- (420)
Other ........................................ 221 204 408
------ ------- -------
$5,538 $ 5,538 $ 4,042
====== ======= =======
-41-
6. CREDIT FACILITIES
The Company's long-term debt consisted of the following (in thousands):
December 31,
-----------------------
2000 1999
--------- ----------
Revolving Line of Credit due July 2005 with
an interest rate of prime plus 1.0% to 2.0%, or
LIBOR plus 2.0% to 3.0% ............................. $ 58,000 $ 51,500
Senior Secured Notes due July 2010
with an interest rate of 7.74% ...................... 50,000 50,000
Subordinated Notes, net of discount, due July 2007
with an interest rate of 12.875% .................... 38,890 --
Capital lease obligations ............................. 77 --
--------- ----------
Total debt ............................................ 146,967 101,500
Less: current maturities .............................. (41) --
--------- ----------
Long-term debt ........................................ $ 146,926 $ 101,500
========= ==========
Effective July 21, 2000, the Company formalized terms under an amended and
restated credit agreement (the "2000 Credit Facility") with a group of financial
institutions. The 2000 Credit Facility provides for borrowings of up to $75.0
million under a revolving line of credit. At December 31, 2000, the remaining
borrowing capacity was $17.0 million. The revolving credit commitment is reduced
by $2.7 million quarterly beginning in January 2002. The 2000 Credit Facility
matures in July 2005 and bears interest, at the election of the Company, at
either the prime rate plus a margin of 1.0% to 2.0%, or a rate which is 2.0% to
3.0% above the applicable LIBOR rate, depending on the level of borrowings. At
December 31, 2000, the margin was at 3.0% above the LIBOR rate. A commitment fee
of 0.5% is charged on the unused portion of the revolving credit commitment. The
2000 Credit Facility is secured by substantially all of the Company's assets,
including the stock of all of the Company's subsidiaries; does not permit the
payment of cash dividends; and requires the Company to comply with certain
leverage, net worth and debt service coverage covenants.
Concurrent with the closing of the 2000 Credit Facility, the Company's
$50.0 million Subordinated Bridge Loan Agreement was refinanced with proceeds
from a Note and Equity Purchase Agreement (the "Subordinated Notes"). The
Subordinated Notes have a seven-year term and are interest-only payable
quarterly at a fixed rate of 12.875%. In conjunction with the issuance of the
Subordinated Notes, the Company issued warrants to purchase 290,370 shares of
the common stock at an exercise price of $6.70. The Company recognized the fair
value of these warrants of $1.1 million as additional paid-in capital. The
warrants may only be exercised by payment of the exercise price in cash to the
Company or by the cancellation of Company indebtedness owed to the warrant
holder.
In July 1998, the Company completed a private placement of $50.0 million
of Senior Secured Notes ("Senior Notes"), of which $25.0 million was issued in
July 1998 and $25.0 million in August 1998. The Senior Notes, which bear
interest at a fixed rate of 7.74%, mature on July 15, 2010. Under the Senior
Notes purchase agreements, the Company is required to make eight annual
principal payments of $6.25 million beginning on July 15, 2003 and comply with
certain financial covenants. Earlier payments of principal are allowed subject
to certain prepayment provisions. Interest is payable semi-annually. The holders
of the Senior Notes and the lenders under the 2000 Credit Facility have a
collateral-sharing agreement whereby both sets of creditors have an equal
security interest in substantially all the assets of the Company.
-42-
Scheduled maturities of long-term debt were as follows (in thousands):
For the year ending December 31,
2001 .............................................. $ 41
2002 .............................................. 36
2003 .............................................. 10,679
2004 .............................................. 16,964
2005 .............................................. 49,107
Thereafter ........................................ 70,140
----------
Total ......................................... $ 146,967
==========
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space, and certain facilities and furniture and
equipment under long-term operating leases. Rent expense for all operating
leases for the years ended December 31, 2000, 1999 and 1998, was approximately
$9.7 million, $5.4 million and $4.5 million, respectively. In November 1999, the
Company entered into an agreement for the sale and leaseback of certain of its
furniture and equipment. The Company has purchase and lease renewal options at
projected future fair market values under the agreements. The leases are
classified as operating leases. At the date of sale, furniture and equipment
with carrying values totaling $11.8 million were sold and the gains realized on
the sale totaling $7.3 million were deferred and are being amortized as a credit
to rent expense over the lease term. The increase in 2000 rent expense compared
to 1999 was due principally to rent expense resulting from this sale and
leaseback transaction.
Under the 2000 Credit Facility, the Company entered into operating lease
agreements for the acquisition or development of operating facilities. This
lease financing arrangement provides for funding to the lessor under the
operating leases of up to $100.0 million, of which approximately $46.4 million
had been utilized at December 31, 2000. The remaining capacity under this lease
financing arrangement is expected to be utilized to complete construction of the
Moshannon Valley Correctional Center. At December 31, 2000, approximately $13.6
million of this lease financing arrangement had been utilized for construction
costs for the Moshannon Valley Correctional Center. The leases under this
arrangement each have a term of five years, include purchase and renewal
options, and provide for residual value guarantees for each lease which average
81.4% of the total cost and would be due by the Company upon termination of the
leases. Upon termination of a lease, the Company could either exercise a
purchase option, or the facilities could be sold to a third party. The Company
expects the fair market value of the leased facilities to substantially reduce
or eliminate the Company's potential obligation under the residual value
guarantee. At December 31, 2000, there were two operating leases under this
arrangement. Lease payments under the lease financing arrangements are variable
and are adjusted for changes in interest rates.
As of December 31, 2000, the Company had the following rental commitments
under noncancelable operating leases and anticipated lease payments under the
Company's facility lease financing arrangement (in thousands):
For the year ending December 31,
2001 $ 11,674
2002 9,752
2003 8,229
2004 5,022
2005 2,509
Thereafter 17,281
----------
Total $ 54,467
==========
-43-
Upon completion of the Moshannon Valley Correctional Center, the Company
expects to enter into a lease pursuant to the terms of the lease financing
arrangement described above. Estimated annual rental commitments are expected to
aggregate approximately $5.0 million during the base lease term.
401(k) Plan
The Company has a defined contribution 401(k) plan. The Company's matching
contribution currently represents 50% of a participant's contribution, up to the
first 6% of the participant's salary. For the years ended December 31, 2000,
1999 and 1998, the Company recorded $923,000, $754,000 and $611,000,
respectively, of contribution expense.
Other
The Company is subject to certain claims and disputes arising in the
normal course of the Company's business. In the opinion of the Company's
management, uninsured losses, if any, resulting from the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
position or results of operations.
8. STOCKHOLDERS' EQUITY
Stockholder Rights Plan
On May 1, 1998, the Company adopted a stockholder rights plan. Under the
plan, each stockholder of record at the close of the business day on May 11,
1998, received one Preferred Stock Purchase Right ("Right") for each share of
common stock held. The Rights expire on May 1, 2008. Each Right initially
entitles the stockholder to purchase one one-thousandth of a Series A Junior
Participating Preferred Share for $120.00. Each Preferred Share has terms
designed to make it economically equivalent to one thousand common shares. The
Rights will become exercisable only in the event a person or group acquires 15%
or more of the Company's common stock or commences a tender or exchange offer
which, if consummated, would result in that person or group owning 15% or more
of the Company's common stock. If a person or group acquires a 15% or more
position in the Company, each Right (except those held by the acquiring party)
will then entitle its holder to purchase, at the exercise price, common stock of
the Company having a value of twice the exercise price. The effect will be to
entitle the holder to buy the common stock at 50% of the market price. Also, if
following an acquisition of 15% or more of the Company's common stock, the
Company is acquired by that person or group in a merger or other business
combination transaction, each Right would then entitle its holder to purchase
common stock of the acquiring company having a value of twice the exercise
price. The effect will be to entitle the Company's stockholders to buy stock in
the acquiring company at 50% of the market price. The Company may redeem the
Rights at $0.01 per Right at any time prior to the acquisition of 15% or more of
its common stock by a person or group.
Preferred Stock
Preferred stock may be issued from time to time by the Board of Directors
of the Company, which is responsible for determining the voting, dividend,
redemption, conversion and liquidation features of any preferred stock.
Options
In December 2000, the Company adopted the 2000 Broad-Based Employee Plan
("2000 Plan"). Pursuant to the 2000 Plan, the Company may grant non-qualified
stock options for up to the greater of 400,000 shares or 4% of the aggregate
number of shares of common stock outstanding. The 2000 Plan options vest up to
five years and expire ten years from the grant date. In May 1996, the Company
adopted the 1996 Stock Option Plan and amended and restated the plan in April
1998 ("1996 Plan"). Pursuant to the 1996 Plan, the Company may grant
non-qualified and incentive stock options for up to the greater of 1,500,000
shares or 15% of the aggregate number of shares of common stock outstanding. The
1996 Plan options vest up to seven years and expire seven to ten years from the
grant date. The Compensation Committee of the Board of Directors is responsible
for determining the exercise price and vesting terms for the granted options.
The
-44-
1996 Plan and 2000 Plan option exercise prices can be no less than the market
price of the Company's common stock on the date of grant.
In conjunction with the issuance of the Subordinated Notes in July 2000,
the Company issued warrants to purchase 290,370 shares of the common stock at an
exercise price of $6.70. The Company recognized the fair value of these warrants
of $1.1 million as additional paid-in capital. The warrants may only be
exercised by payment of the exercise price in cash to the Company or by the
cancellation of Company indebtedness owed to the warrant holder.
The following is a summary of the status of the Company's 2000 Plan, 1996
Plan and other options at December 31, 2000, 1999 and 1998, and changes during
the years then ended:
2000 1999 1998
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year .. 1,242,637 $11.46 1,338,839 $15.73 854,454 $6.60
Granted ........................... 378,877 5.30 463,000 11.98 932,872 22.83
Exercised ......................... (10,000) 2.50 (57,200) 10.60 (177,187) 2.94
Forfeited or canceled ............. (317,466) 19.74 (502,002) 23.40 (271,300) 19.76
---------- ---------- ----------
Outstanding at end of year ........ 1,294,048 7.70 1,242,637 11.46 1,338,839 15.73
========== ========== ==========
Exercisable at end of year ........ 619,673 6.79 523,712 7.17 487,557 5.84
Weighted average fair value of
options granted ................ $3.03 $9.48 $16.41
The following table summarizes information about stock options outstanding
at December 31, 2000:
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ---- ----- ----------- -----
$ 2.00 to $ 2.50 ...................... 93,919 4.4 $ 2.02 93,919 $ 2.02
3.75 to 5.64 ...................... 594,525 7.8 4.66 318,177 4.91
7.59 to 9.00 ...................... 82,000 9.0 8.36 61,000 8.23
10.375 to 15.19 ...................... 444,100 8.3 11.31 111,660 12.25
15.81 to 24.38 ...................... 79,504 7.4 16.27 34.917 16.86
--------- ---------
1,294,048 7.6 $ 7.52 619,673 $ 6.76
========= =========
Had compensation cost for the stock option grants under the 2000 Plan, the
1996 Plan and other stock options been determined under SFAS No. 123, the
Company's net income and diluted net earnings per share would have been the
following (in thousands, except per share amounts):
Year Ended December 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
Net income: As reported $ 7,969 $ 5,352 $ 6,062
Pro forma 6,093 3,662 4,380
Earnings per share (diluted): As reported .84 .55 .62
Pro forma .64 .38 .45
-45-
Under SFAS No. 123, the fair value of each option grant was estimated on
the date of grant using the minimum value calculation prior to the Company's
initial public offering ("IPO") and the Black-Scholes option pricing model
subsequent to the IPO. The following weighted average assumptions were used for
grants in 2000, 1999 and 1998, respectively: risk-free interest rates of 5.4%,
6.6% and 5.8%; dividend rates of $0, $0 and $0; expected lives of 6.6, 10.0 and
10.0 years; expected volatility of 52.76%, 65.74% and 54.70%.
The Black-Scholes option pricing model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferrable. In addition, option valuation
models require the input of, and are highly sensitive to, subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
Notes from Shareholders
On July 8, 1996, the prior Chief Executive Officer and the current Chief
Executive Officer of the Company exercised options to purchase 137,110 and
82,750 shares of Class A Common Stock and Class B Common Stock at an aggregate
price of $274,220 and $180,638, respectively. In connection with the exercise,
each officer entered into a promissory note with the Company for the respective
aggregate exercise amounts. The promissory notes, as amended in July 2000, bear
interest at 6.63%, mature in June 2004, are full recourse and are collateralized
by shares of common stock.
Treasury Stock
During the years ended December 31, 2000 and 1998, the Company repurchased
258,400 and 142,100 shares, respectively, of common stock on the open market
under a share repurchase program at an aggregate cost of $1.9 million and $1.6
million, respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan whereby employees can make
contributions to purchase the Company's common stock. Purchases of common stock
are made annually at the lower of the beginning or end of year market value,
less a 15% discount. For the year ended December 31, 2000, contributions of
$97,000 were used to purchase 13,585 shares of the Company's common stock.
9. SEGMENT DISCLOSURE
The Company's three operating divisions are its reportable segments. The
adult secure institutional segment consists of the operation of secure adult
incarceration facilities. The juvenile segment consists of providing residential
treatment and educational programs and non-residential community-based programs
to juveniles between the ages of 10 and 17 who either have been adjudicated or
suffer from behavioral problems. The pre-release segment consists of providing
pre-release and halfway house programs for adult offenders who are either on
probation or serving the last three to six months of their sentences on parole
and preparing for re-entry into society at large. The accounting policies of the
Company's segments are the same as those described in the summary of significant
accounting policies in Note 1. Intangible assets are not included in each
segment's reportable assets, and the amortization of intangible assets is not
included in the determination of a segment's operating income or loss. The
Company evaluates performance based on income or loss from operations before
general and administrative expenses, incentive bonuses, amortization of
intangibles, interest and income taxes. Corporate and other assets are comprised
primarily of cash, accounts receivable, deposits, deferred costs and deferred
taxes.
-46-
The only significant noncash item reported in the respective segments'
income or loss from operations is depreciation and amortization (excluding
intangibles).
Year Ended December 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands)
Revenues
Adult secure institutional ............. $ 91,163 $ 76,011 $ 52,630
Juvenile ............................... 86,033 67,131 47,032
Pre-release ............................ 48,854 33,825 23,457
--------- --------- ---------
Total revenues .............................. $ 226,050 $ 176,967 $ 123,119
========= ========= =========
Depreciation and amortization
Adult secure institutional ............. $ 2,873 $ 3,013 $ 2,145
Juvenile ............................... 1,162 1,001 739
Pre-release ............................ 1,100 831 685
Amortization of intangibles ............ 1,528 810 415
Corporate and other .................... 613 352 244
--------- --------- ---------
Total depreciation and amortization ......... $ 7,276 $ 6,007 $ 4,228
========= ========= =========
Income (loss) from operations
Adult secure institutional ............. $ 20,126 $ 17,930 $ 12,638
Juvenile ............................... 10,976 8,482 5,058
Pre-release ............................ 11,786 7,122 4,043
General and administrative expenses .... (12,024) (9,932) (7,581)
Incentive bonuses ...................... -- (50) (803)
Amortization of intangibles ............ (1,528) (810) (415)
Corporate and other .................... (275) (493) (351)
--------- --------- ---------
Total income from operations ................ $ 29,061 $ 22,249 $ 12,589
========= ========= =========
Assets
Adult secure institutional ............. $ 143,743 $ 141,268 $ 127,774
Juvenile ............................... 59,630 53,498 37,917
Pre-release ............................ 51,802 47,952 28,815
Intangible assets, net ................. 16,861 17,911 9,935
Corporate and other .................... 19,403 13,362 8,254
--------- --------- ---------
Total assets ................................ $ 291,439 $ 273,991 $ 212,695
========= ========= =========
Capital expenditures
Adult secure institutional ............. $ 5,172 $ 13,536 $ 40,243
Juvenile ............................... 3,924 4,203 5,927
Pre-release ............................ 786 5,184 2,188
Corporate and other .................... 2,214 6,144 1,125
--------- --------- ---------
Total capital expenditures .................. $ 12,096 $ 29,067 $ 49,483
========= ========= =========
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10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
-------- ------- ------- ------- --------
(in thousands, except per share data)
2000:
Revenues .................................. $ 53,468 $55,408 $56,746 $60,428 $226,050
Income from operations .................... 6,901 7,466 7,516 7,178 29,061
Net income ................................ 1,971 2,193 1,932 1,873 7,969
Earnings per share:
- Basic ................................... $ .21 $ .23 $ .21 $ .20 $ .85
- Diluted ................................. $ .21 $ .23 $ .20 $ .20 $ .84
1999:
Revenues .................................. $ 38,356 $43,609 $45,321 $49,681 $176,967
Income from operations .................... 3,987 4,815 5,945 7,502 22,249
Income before cumulative effect of
change in accounting principle .......... 1,440 1,783 2,287 2,796 8,306
Net income (loss) (1) ..................... (1,514) 1,783 2,287 2,796 5,352
Earnings per share before cumulative effect
of change in accounting principle:
- Basic ................................... $ .15 $ .19 $ .24 $ .30 $ .88
- Diluted ................................. $ .15 $ .18 $ .24 $ .29 $ .86
Earnings per share:
- Basic ................................... $ (.16) $ .19 $ .24 $ .30 $ .57
- Diluted ................................. $ (.16) $ .18 $ .24 $ .29 $ .55
1998:
Revenues .................................. $ 27,041 $29,099 $30,731 $36,248 $123,119
Income from operations .................... 2,393 2,482 3,285 4,429 12,589
Net income ................................ 1,258 1,281 1,596 1,927 6,062
Earnings per share:
- Basic ................................... $ .13 $ .14 $ .17 $ .20 $ .64
- Diluted ................................. $ .13 $ .13 $ .16 $ .20 $ .62
(1) The Company adopted SOP 98-5 in January 1999 and recorded a net-of-tax
charge of approximately $3.0 million for the cumulative effect of a change
in accounting principle.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 10, 11, 12 and 13 of Part III have been omitted from this report
because the Company will file with the Securities and Exchange Commission, not
later than 120 days after the close of its fiscal year, a definitive proxy
statement. The information required by Items 10, 11, 12 and 13 of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into Part III of this report.
-48-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial statements and reports of Arthur Andersen LLP
Report of Independent Public Accountants
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial statement schedules
All schedules are omitted because they are not
applicable or because the required information is included
in the financial statements or notes thereto.
3. Exhibits
Incorporated
Exhibit No. Description by Reference
3.1 Restated Certificate of Incorporation of the 1
Company.
3.2 Amended and Restated Bylaws of the Company. 10
4.1 Certificate representing Common Stock. 2
4.2 Registration Rights Agreement dated as of March 2
31, 1994, as amended, among the Company and the
stockholders listed on the signature pages
thereto.
4.3 Rights Agreement dated as of May 1, 1998 between 7
the Company and the stockholders listed on the
signature pages thereto.
9.1 Stock Transfer and Voting Agreement dated 2
November 23, 1994 between David M. Cornell and
Jane B. Cornell.
10.1 Cornell Corrections, Inc. Amended and Restated 6
1996 Stock Option Plan. (a)
10.2 Employment Agreement dated as of September 9, 3
1997 between Abraxas Group, Inc. and Arlene R.
Lissner. (a)
10.3 Covenant Not to Compete Agreement dated as of 3
September 9, 1997 by and between the Company and
Arlene R. Lissner. (a)
10.4 Form of Indemnification Agreement between the 2
Company and each of its directors and executive
officers.
10.5 Stockholders Agreement among certain 3
stockholders named therein dated September 15,
1997.
10.6 Contract between CCCI and the CDC (No. 92.401) 2
for the Baker, California Facility dated June
25, 1992, as amended.
10.7 Professional Management Agreement between the 2
Company and Central Falls Detention Facility
Corporation dated July 15, 1992.
10.8 Operating Agreement by and between each of 2
MidTex Detentions, Inc., the City of Big Spring,
Texas ("Big Spring") and Cornell Corrections of
Texas, Inc. ("CCTI") dated as of July 1, 1996
and related Assignment and Assumption of
Operating Agreement.
10.9 Contract between CCCI and the CDC (No. R92.132) 2
for the Live Oak, California Facility dated
March 1, 1993, as amended.
10.10 Asset Purchase Agreement dated as of January 31, 4
1997 by and between CCTI and Interventions Co.
-49-
Incorporated
Exhibit No. Description by Reference
10.11 Asset Purchase Agreement dated as of August 14, 3
1997 by and between the Company and Abraxas
Group, Inc., Foundation for Abraxas, Inc.,
Abraxas Foundation, Inc., Abraxas Foundation of
Ohio and Abraxas, Inc.
10.12 Contract between Texas Alcoholism Foundation, 2
Inc. and the Texas Department of Criminal
Justice, Parole Division for the Reid Facility
dated January 31, 1996, as amended.
10.13 Form of Contract between CCCI and the Utah State 2
Department of Human Services, Division of Youth
Corrections for the Salt Lake City, Utah
Juvenile Facility.
10.14 Asset Purchase Agreement among CCTI, Texas 2
Alcoholism Foundation, Inc. and the Texas House
Foundation, Inc. dated May 14, 1996.
10.15 Asset Purchase Agreement among CCTI, the 2
Company, Ed Davenport, Johnny Rutherford and
MidTex Detentions, Inc. dated May 22, 1996.
10.16 Lease Agreement between CCCI and Baker Housing 2
Company dated August 1, 1987 for the Baker,
California facility.
10.17 Lease Agreement between CCCI and Sun Belt 2
Properties dated as of May 23, 1988, as amended
for the Live Oak, California facility.
10.18 Lease Agreement between Big Spring and Ed 2
Davenport dated as of July 1, 1996 for the
Interstate Unit and related Assignment and
Assumption of Leases.
10.19 Secondary Sublease Agreement between Big Spring 2
and Ed Davenport dated as of July 1, 1996 for
the Airpark Unit and related Assignment and
Assumption of Leases.
10.20 Secondary Sublease Agreement between Big Spring 2
and Ed Davenport dated as of July 1, 1996 for
the Flightline Unit and related Assignment and
Assumption of Leases.
10.21 Stock Option Agreement between the Company and 2
CEP II dated July 9, 1996.
10.22 Form of Option Agreement between the Company and 10
the Optionholder listed therein dated as of
November 1, 1995.
10.23 Senior Note Agreement by and between the Company 8
and the Note Purchasers dated July 15, 1998.
10.24 Asset Purchase Agreement dated as of November 5
17, 1997 by and between Foresite Capital
Facilities Corporation and the Hinton Economic
Development Authority.
10.25 Amendment dated December 10, 1997 to Asset 5
Purchase Agreement dated as of November 17,
1997.
10.26 Amendment No. 2 dated January 6, 1998 to Asset 5
Purchase Agreement dated as of November 17,
1997.
10.27 Assignment of Agreement of Purchase and Sale 5
dated as of January 5, 1998 by and between
Foresite Capital Facilities Corporation and
Cornell Corrections of Oklahoma, Inc.
10.28 Allvest Asset Purchase Agreement dated as of 9
June 20, 1998 by and between the Company and
Allvest, Inc., St. John Investments, and William
C. Weimar.
10.29 Asset Purchase Agreement by and among the 11
Company and Interventions and IDDRS Foundation
dated May 10, 1999.
10.30 Extension of Asset Purchase Agreement by and 11
among the Company and Interventions and IDDRS
Foundation dated September 30, 1999.
10.31 Asset Purchase Agreement by and among BHS 11
Consulting Corp., its Shareholders and the
Company dated May 10, 1999.
10.32 Extension of Asset Purchase Agreement by and 11
among BHS Consulting Corp., its Shareholders and
the Company dated September 30, 1999.
-50-
Incorporated
Exhibit No. Description by Reference
10.33 Amendment to Asset Purchase Agreement by and 11
among BHS Consulting Corp., its Shareholders and
the Company dated November 12, 1999.
10.34 Participation Agreement among the Company and 12
certain of its subsidiaries and Heller Financial
Leasing, Inc. dated November 23, 1999.
10.35 Lease Agreement between First Security Bank, 12
National Association, and the Company and
certain of its subsidiaries dated November 23,
1999.
10.36 Lease Agreement by and among Hinton Economic 12
Development Authority, the Town of Hinton,
Oklahoma, and Cornell Corrections of Oklahoma,
Inc. dated December 31, 1999.
10.37 Consulting Agreement between the Company and 12
David M. Cornell dated December 15, 1999. (a)
10.38 Form of Severance Agreement executed by John 12
Hendrix, Arlene Lissner, Thomas Jenkins, Thomas
Rathjen, Patrick Perrin and Steven Logan. (a)
10.39 Fourth Amended and Restated Credit Agreement 13
among the Company, certain subsidiaries of the
Company, Atlantic Financial Group, Ltd., the
Lenders and ING (U.S.) Capital LLC, as
Administrative Agent, dated as of July 21, 2000.
10.40 Amended and Restated Master Agreement among the 13
Company, certain subsidiaries of the Company,
Atlantic Financial Group, Ltd., the Lenders, ING
(U.S.) Capital LLC, as Administrative Agent,
Bank of America N.A., as Syndication Agent, and
Suntrust Equitable Securities Corporation, as
Documentation Agent, dated as of July 21, 2000.
10.41 Note and Equity Purchase Agreement among the 13
Company, American Capital Strategies, Ltd. and
Teachers Insurance and Annuity Association of
America, dated as of July 21, 2000.
10.42 Warrant issued by the Company to American 13
Capital Strategies, Ltd. dated as of July 21,
2000.
10.43 Warrant issued by the Company to Teachers 13
Insurance and Annuity Association of America,
dated as of July 21, 2000.
10.44 Cornell Corrections, Inc. Employee Stock Purchase
Plan (a) 14
10.45 Cornell Companies, Inc. 2000 Director Stock Plan(a) 15
10.46 Cornell Companies, Inc. 2000 Broad-Based 16
Employee Plan.(a)
11.1 Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney.
(a) Management compensatory plan or contract.
(1) Annual Report on Form 10-K of the Company for the year ended December 31,
1996.
(2) Registration Statement on Form S-1 of the Company (Registration No.
333-08243).
(3) Registration Statement on Form S-1 of the Company (Registration No.
333-35807).
(4) Current Report on Form 8-K of the Company dated January 31, 1997.
(5) Current Report on Form 8-K of the Company dated January 6, 1998.
(6) Definitive Proxy Statement dated March 9, 1998.
(7) Registration Statement on Form 8-A of the Company filed May 11, 1998.
(8) Quarterly Report on Form 10-Q of the Company for the quarter ended June
30, 1998.
(9) Current Report on Form 8-K of the Company dated August 13, 1998.
(10) Annual Report on Form 10-K of the Company for the year ended December 31,
1998.
(11) Quarterly Report on Form 10-Q of the Company for the quarter ended
September 30, 1999.
(12) Annual Report on Form 10-K of the Company for the year ended December 31,
1999.
(13) Quarterly Report on Form 10-Q of the Company for the quarter ended June
30, 2000.
(14) Registration Statement Form S-8 of the Company(Registration No. 333-80187)
(15) Registration Statement Form S-8 of the Company (Registration No.
333-42444)
(16) Registration Statement Form S-8 of the Company (Registration No.
333-52236)
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CORNELL COMPANIES, INC.
Dated: March 30, 2001 By: /s/ Steven W. Logan
-------------------
Steven W. Logan
President and
Chief Executive Officer
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ STEVEN W. LOGAN President, Chief Executive March 30, 2001
- --------------------------- Officer and Director
Steven W. Logan (Principal Executive Officer)
/s/ JOHN L. HENDRIX Senior Vice President and March 30, 2001
- --------------------------- Chief Financial Officer
John L. Hendrix (Principal Financial Officer
and Principal Accounting
Officer)
/s/ PETER A. LEIDEL* Chairman of the Board March 30, 2001
- ---------------------------
Peter A. Leidel
/s/ ANTHONY R. CHASE* Director March 30, 2001
- ---------------------------
Anthony R. Chase
/s/ JAMES H.S. COOPER* Director March 30, 2001
- ---------------------------
James H.S. Cooper
/s/ DAVID M. CORNELL* Director March 30, 2001
- ---------------------------
David M. Cornell
/s/ ARLENE R. LISSNER * Director March 30, 2001
- ---------------------------
Arlene R. Lissner
/s/ HARRY J. PHILLIPS, JR. * Director March 30, 2001
- ---------------------------
Harry J. Phillips, Jr.
/s/ TUCKER TAYLOR* Director March 30, 2001
- ---------------------------
Tucker Taylor
/s/ MARCUS A. WATTS * Director March 30, 2001
- ---------------------------
Marcus A. Watts
* By: STEVEN W. LOGAN
--------------------
Steven W. Logan
Attorney-in-Fact
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